It was a dramatic week for financial markets

AS HAD BEEN anticipated in last week’s review, markets reacted strongly on various economic indicators and policy decisions last week. Globally equity markets had rallied strongly as both the European Central Bank’s Mario Draghi and the Fed chairperson Jerome Powell gave strong indications that interest rates will start to move lower in a new cycle of downward rates in months to come.

Bond rates in reaction had tumbled with the US 10-year bond dipping in below 2.0 percent. Yields on 10-year German government bonds fell to a fresh all-time low of -0.315 percent, as investors digested the prospect of fresh bond purchases by the ECB. French 10-year yields dropped sharply and hit 0 percent, their lowest ever.

Domestically, in reaction to these more dovish stance by the world’s two major central banks and in anticipation of a possible cut in the repo rate by the Reserve Bank’s Monetary Policy Committee (MPC) during the next few months, the government long-term bond R186 also had dropped by almost 40 points last week and almost had traded almost below 8.0 percent.

The announcement of the steady and sideways movement in the inflation rate to 4.5 percent in May, only marginally higher than the 4.4 percent recorded in April also supported a stronger rand and lower bond rates.

Share, bond and the exchange markets had remained bullish in anticipation of President Ramaphosa’s second State of the Nation Address (Sona) last Thursday. Although President Ramaphosa was criticised for once again mentioning only plans and not implementation to revive the economy and job creation, markets were satisfied that the government will attempt to rescue Eskom and deal with corruption through a special investigation unit.

The Sona, however, did not convince the markets that the bailing out of Eskom will keep the government’s debt-to- GDP ratio below 60 percent. A further downgrading to junk later in the year, therefore, remains a strong possibility.

The strong increase in the price for bullion to levels exceeding $1 400 pushed the gold mining index up by 1.04 percent. Industrials had gained 0.8 percent. The stronger rand had pushed financials up by almost 4 percent, while listed property had recovered strongly by 2.1 percent.

The more bullish sentiment towards lower global interest rates and a possible trade agreement between the US and China at the G20 summit at the end of this week had led the rand exchange rate appreciated strongly during last week. At the close of the JSE the currency traded at R14.33/$. This was 33 cents stronger than the R14.79/$ of the previous Friday and 63 cents better than two weeks ago.

Despite the strong increase in the international oil price, given lower than expected oil reserves in the US and further geopolitical tension between the US ad Iran, fuel prices in South Africa remain over-recovered. On Friday the Central Energy Fund’s calculation of fuel prices, since the previous adjustment on May 30, 2019, had shown that the petrol price remains over recovered by 90c per litre and that of diesel by 70c per litre. A sharp decrease in fuel prices during the first week in July is expected.

Chris Harmse: Chief economist Rebalance Fund Managers.