MEET­ING, VOT­ING, RAT­ING — AND UN­CER­TAINTY

Financial Mail - Investors Monthly - - Opening Bell -

ovem­ber is go­ing to be a crowded month for mar­ket watch­ers, with the US elec­tion tak­ing cen­tre stage in­ter­na­tion­ally, while do­mes­ti­cally labour re­form, mon­e­tary pol­icy and the pos­si­bil­ity of fur­ther credit rat­ing down­grades will top the agenda.

The first cal­en­dar item of note is the Fed­eral Open Mar­ket Com­mit­tee meet­ing on Novem­ber 1-2 in the US. Though US Fed chair Janet Yellen has said that the meet­ing re­mains “live”, in the sense that a 25 ba­sis points hike could be an­nounced, the mar­kets be­lieve there is al­most no pos­si­bil­ity of a move.

Ac­cord­ing to the CME’s Fed Funds Fu­tures Tracker, the prob­a­bil­ity of a Fed hike in Novem­ber is just 10%. The odds rise to 70% for the Fed’s De­cem­ber meet­ing.

This is based on the view that the US elec­tion, sched­uled for Novem­ber 8, has the po­ten­tial to be mar­ket mov­ing. The Fed is, there­fore, un­likely to want to add to the noise by rais­ing rates at its Novem­ber meet­ing.

Yellen has made it clear that at least one rate hike is on the ta­ble for this year. The com­mit­tee last moved rates in De­cem­ber 2015. It was the first hike in more than nine years.

At the time of writ­ing, US bet­ting odds put the like­li­hood of an elec­tion vic­tory for Hil­lary Clin­ton at just over 80% and that of a win for Don­ald Trump at only about 20%. This sug­gests that if Clin­ton is elected the mar­ket re­ac­tion is likely to be muted, since this out­come is doubtlessly al­ready priced in.

Rand Mer­chant Bank (RMB) cur­rency strate­gist John Cairns thinks that if in the un­likely event that Trump is vic­to­ri­ous it would be pos­i­tive for the US dol­lar and

Nneg­a­tive for the rand. “The rand could suf­fer ini­tially as there is a lot of un­cer­tainty about the poli­cies that Trump would fol­low, so a vic­tory for him would re­sult in global risk aver­sion, which is typ­i­cally neg­a­tive for the rand,” Cairns ex­plains. He lists three rea­sons why a Trump vic­tory could be pos­i­tive for the dol­lar.

First, Trump has es­poused pro­tec­tion­ist poli­cies, which would limit im­ports, thereby help­ing to nar­row the US’s $500bn trade deficit with the rest of the world.

Sec­ond, he has es­poused fis­cal poli­cies, par­tic­u­larly tax poli­cies, which would stim­u­late the US econ­omy and likely cause higher in­ter­est rates, at­tract cap­i­tal in­flows and sup­port the US dol­lar.

Third, he has pro­posed a tax hol­i­day for the off­shore earn­ings of US cor­po­rates, which would cause dol­lars to be repa­tri­ated into the US, bid­ding up its value.

On all three is­sues Clin­ton sup­ports sim­i­lar poli­cies, but she is less likely to fol­low through on all three, es­pe­cially the tax hol­i­day, Cairns feels.

One caveat is that the dol­lar has so far not proved sen­si­tive to the US elec­tion process, rais­ing the pos­si­bil­ity that it may not re­act as RMB ex­pects.

But even if the dol­lar re­mains un­moved, a Trump vic­tory would prob­a­bly still weaken the rand by spark­ing a bout of global risk aver­sion. This is un­likely to be sus­tained, how­ever.

Much will de­pend on the poli­cies that Trump ac­tu­ally im­ple­ments.

Do­mes­ti­cally, in early Novem­ber government could de­liver an im­por­tant pack­age of labour mar­ket re­forms aimed at re­duc­ing labour’s propen­sity to strike as well as curb­ing the

Moody’s still ex­pects SA’s debt-to-GDP ra­tio to sta­bilise as early as this year and then to start to de­cline. It is also op­ti­mistic that growth is start­ing to turn up

Newspapers in English

Newspapers from South Africa

© PressReader. All rights reserved.