• Stonewood AM

SILENT EASING



Janet Yellen made some comments a few days ago. Seemingly the comments were fairly innocuous. The US Federal Reserve has played on both sides of the line over the past five years. Are we hiking or are we easing? Well it’s certainly not been clear cut and the world reacts every time anything is even discussed by the Fed.

On the home-front we have watched the Rand remain very volatile. Ratings agencies have been present and meeting with various parties in the government and private sector to get a better understanding of the political and economic risks our country faces. At the same time inflation numbers breached the 7% number which makes all consumers flinch because the likelihood of future interest rate hikes seem almost inevitable. This on top of the already hefty hikes South Africans have had to endure. So what seemed like an inevitable death spiral to junk status seems to have suddenly taken a turn. I might add at this point that nothing locally has changed economically or structurally, which is the focal point of all of the attention we are receiving from ratings agencies.

Abroad however, Janet Yellen might have thrown all emerging markets a lifeline. Did she announce a new wave of quantitative easing? No. Did she drop interest rates to stimulate US consumer spending? No. This seems a little confusing if you look at what normally would have triggered such a global market reaction. Yet global equities are receiving massive support with special reference to emerging markets and commodity producers. South Africa falls into both of those categories.

The Fed has essentially got to a point where it has signaled for so long that it is hiking interest rates to get back to a “normal” level of interest rates as the economy recovers. It has as some would say, for a while now, “telegraphed” the trajectory of interest rates. So the world’s financials markets have had to begin digesting this new trajectory.

Many people, far wiser than I ever could wish to be, have pointed out that the global economy and US economy is not as strong as the unemployment numbers allude to. In fact many very well respected money managers and economists have for a while implied that the Fed should be easing rather than tightening monetary policy. Which would be more supportive of global economic activity and growth, which is exactly what the world seems to be missing.

The outcome of this ambiguity is that when the US Fed makes any announcement that is contrary to their telegraphed trajectory it itself is a surprise to the market. Any surprise to the market is news that is not expected. In this case any announcement that points to the fact that the US Fed will not tighten at the rate at which they have projected it essentially means that their easing monetary policy will exist for a little longer.

To put this back into layman's terms: the US Fed is worried that the global economy and the US economy are too weak to stand on their own two legs. This means that the waves of money that Central Banks have been washing the world with post 2008 will remain a little longer. The outcome for investors is a slightly longer investing window for global growth assets in the hope that these will begin to yield more attractive returns as growth gains more momentum. The other reality is that with such low and even negative interest rates in some parts of the world, any growth asset seems like the only place that offers any potential for positive real returns. The outcome in short is that the Dollar does not look as attractive as it did a few weeks ago and Emerging Market commodity producers don’t look as unattractive as they did. So has the US Fed managed to announce that it will be easing rather than tightening in the near term without saying as much?

The one thing to point out is that this modern world that is so reliant on central bank support reacts positively to bad news instead of good news. The bad news floats financial assets that have become dependent on stimulation policy. Either way, at some point we have to hope that the Fed has the ability to raise rates as global growth improves. Until that point in time we can enjoy a better exchange rate which might help us with keeping interest rates and inflation in check. Which in turn may keep ratings agencies at bay.

Local Market


Out of the 3 days that the South African markets were open for trade, all sectors took a knock due to negative global sentiment. Local inflation figures were released last week and February’s Consumer Price Index (CPI) data came in higher than expected. the Reserve bank governor has raised rates to try and curb the rampant inflation we seem to be importing. The All Share gave back recent gains, closing the week down 2.79%. The Top 40 closed 3.06% lower.

Rising interest rates did little to stem losses as the resource and financial sectors were the main detractors losing 5.04% and 3.98% respectively. Investors’ risk appetites seem to be declining. Industrials were not isolated from the selloff, closing the week 2.18% in the red.

Global Market


European markets closed the week lower amid bombings in Brussels, the EUROSTOXX closed 2.39% lower. The UK market was not sheltered as consumer data showed declines. The FTSE lost 1.34% over the week and the Brexit is certainly top of mind for all European constituents. The German DAX lost 1.00% as it too felt the impact of lower global growth expectations as well as the contagion of the terror fears post the Brussels bombing.

US markets traded relatively flat or negative for the week, with the S&P closing 0.67% lower. The Dow Jones closed 0.20% higher while the NASDAQ shed 0.46%. Economic data released last week, came in better than expected. Oil remains undecided on what its stable pricing level is. The Dollar has however lost its shine after recent Yellen comments making the demand seem try dry up slightly.

Markets in Asia closed mixed over the course of last week, with economic data showing a combination of negative and positive results. The Hang Seng ended the week 1.58% lower while the Nikkei added 1.66%. The Japanese market was a surprise package on the back of poor global market performance but is still more than 8% down for the year.

Economic News


The Rand weakened against major currencies with the exception of the British Pound. The US Dollar strengthened on the back of the US GDP rising 1.4%. The Rand closed 1.31% lower against the Dollar and 0.47% against the Euro. It closed 1% stronger against the Sterling with retail sales data from the UK dropping 0.4% for the month of February. This compounded the current uncertainty around the Brexit.

Commodities closed lower last week with Gold losing 3.09% after a strong start to the year. That being said tepid economic growth and increased volatility are likely to remain catalysts for gold buyers.. Persistent concerns regarding the global supply glut continue to weigh on Oil, Brent Crude closed the week 2.34% lower. Investors await the highly anticipated results of OPEC’s meeting with non OPEC members in regards to a possible freeze in oil production next month.


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