Foreigners should have heeded SA fund managers

OVER recent weeks, one hasn’t seen much of the “risk-on” or “risk-off” narrative commonly used by uninspired commentators to describe the performance of markets on any given day. Instead, fundamentals are playing a much bigger part in sentiment and given the continuing labour disputes in mining, the focus couldn’t have come at a worse time.

Contagion from what’s turning into a very disturbing strike season has hit Anglo American’s Kumba Iron Ore unit, with production halted at its Sishen mine in the Northern Cape. The platinum and gold mining sectors, which provide the bulk of our commodity earnings, have experienced work stoppages for more than a month now.

As panic recedes over the future of Europe and its common monetary union and with the central bank stimulus bets having been made, the meltdown we are seeing in the mining space becomes the concern for investors in London and New York.

Forget the yield. Capital markets are taking a distinct disliking to developments on the ground. Maybe they should have listened to South African fund managers who have shied away from resources.

Most affected so far has been the rand, whose correlation with the euro seems a thing of the past. The inclusion of 12 government bonds on a Citibank global index has managed to hold it up.

The currency pushed past R8,50/$1 for the first time since June yesterday. Since the middle of last month it has been on a downward spiral against the dollar. (In good times exporters might have had reason to smile, but weakness in Europe, the US and China has led to subdued demand.)

The weakness in the rand is in sharp contrast to a stronger gold price that may well hit $1,800/oz by Monday, if not later today. In light of the platinum production problems, gold rose more than 1,8% in late evening trade. Usually, higher prices would support the rand.

Foreign investors sold R1,9bn of local bonds on Wednesday, the first day of net sales since SA was included in the global index.

SA’s socioeconomic problems are having an extended run in the marketplace. Given the actors in the political theatre in the ruling party, especially as we head towards a leadership conference at the end of the year, it’s more than likely to get worse before it gets better. (Someone has to high-five whoever has kept Julius Malema quiet over the past week.)

If there’s a sustained period of rand weakness, forecasts of benign inflation for the fourth quarter have to be revisited.

Rising inflationary pressures coupled with a struggling economy strained particularly by labour strife should make for an interesting final policy meeting for the year at the Reserve Bank next month.

AS PRESSURE grows on the Spanish government to ask for aid, Italy’s technocrats may be wondering when markets are going to push for their country, which has the third-biggest economy in the eurozone, to stand in line for its own package.

If it’s inevitable that Spanish Prime Minister Mariano Rajoy will have to ask for aid, then Italy may very well be next.

Yesterday, European Central Bank (ECB) president Mario Draghi said the bank was ready to start buying the government bonds of countries in need of assistance. The pledge comes with one caveat: countries that want help with their debts must firstly ask for emergency aid and submit their economic policies for scrutiny of the troika of the ECB, the European Union and the International Monetary Fund.

That condition is the reason for Spain’s reticence. So far, the country has avoided being the fourth bail-out recipient, but it can’t hold out for too long.

As long as Europe remains in what is essentially a recession, it will be nearly impossible for Spain to dig itself out of its problems as borrowing costs rise. When their borrowing costs rose to unsustainable levels, Ireland, Portugal and Greece had to ask for aid.

If or rather when Spain bites the bullet, there will be a full interrogation of Italy, whose debt to gross domestic product is over 120%. And after that France, which hasn’t balanced its books since 1974, may also fall in line.

So as long as Spain delays the inevitable, so do Italy and France remains off the front pages of this sovereign debt crisis.

For a technocrat at the helm of Italy, asking for aid and getting protection from the ECB is the sensible thing to do. But for a French president elected on a growth platform, more austerity could be suicidal.

France must be hoping that Spain continues its struggles for as long as possible. E-Mail: derbyr@bdfm.co.za Twitter: @ronderby