MEETING, VOTING, RATING — AND UNCERTAINTY
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