SA markets experiencing the calm before the storm

MUCH attention this week has been focused on a string of local economic data, some of which have disappointed, while others reignited optimism about the economy.

The not-so-optimistic news came when the deficit on the current account was announced to have widened more than expected in the second quarter, to 6.5% of gross domestic product (GDP), from 5.8%.

More positive were manufacturing production data for July, and improved spending by private companies and households in the second quarter.

Before we forget, there was also SA’s oversubscribed $2bn 12-year global bond, issued this week to investors in the international capital markets.

The current account data temporarily moved bonds and the rand weaker, although developments beyond SA overshadowed the data, and weakened these assets even further. The rand has appreciated somewhat against major currencies, in line with those from other emerging markets, following signs the US may follow a diplomatic route over Syria, rather than an attack, after Damascus used chemical weapons against civilians. While nothing has been concluded and much could still change, markets have understood US President Barack Obama’s request to Congress to delay a vote on military action against Syria, as being the first step towards what could be more good news.

If Russia, which is actively involved in finding a diplomatic solution, succeeds in persuading Syria to hand over all its chemical weapons, military intervention might be averted and that could lead to further gains for the rand.

All these US and Syria developments, coupled with dollar weakness, have led to some inflows and gains in emerging economies.

The rand briefly touched R9.88/$ yesterday, its best level since August 15.

Even oil prices came off their six-month highs of more than $115 a barrel to settle at about $111 on the better global sentiment.

If only it were downhill from here. The fact remains that even if a US attack on Syria does not happen, there are other developments waiting in the wings.

Our markets are at the moment going through what could best be described as the calm before the storm. Next week is important, as it is when the world will finally hear whether the US Federal Reserve’s monthly monetary stimulus of $85bn will continue for a while longer, or whether it will be reduced from this month.

The federal open market committee ( FOMC) will meet next Tuesday and Wednesday.

This meeting will present a summary of projections for the US economy and a press conference by Federal Reserve chairman Ben Bernanke.

When the FOMC emerged from its July meeting, the tone was upbeat in nature.

In their statement, the commit- tee members said information suggested economic activity expanded at a modest pace during the first half of the year.

US economic data has been mixed since then, some overshooting expectations while others disappointed.

Bringing it back home, the Reserve Bank’s monetary policy committee (MPC) also meets next week. At least it has less to worry about than the FOMC.

The MPC’s decision will affect local markets, while the decision by the FOMC will definitely hit many around the world.

The MPC will be encouraged by signs of growth in consumer spending and the 5.4% year-on-year jump in manufacturing in July.

Growth in spending by households was 2.5% in the second quarter, up from 2.3% the quarter before.

Although encouraging, this growth is meagre by historical standards, and points to households that are still in need of a low-interest rate environment to get back on their feet.

The MPC will not be happy about the volatility that has characterised the rand since it last met in July.

Another area of discussion at the MPC meeting will be that of inflation, which has edged higher since its July meeting, rising to 6.3% year on year.

This was a breach of the Reserve Bank’s mandate of keeping inflation within a 3%-6% range.

The Reserve Bank is expected to remain more tolerant of higher inflation, given that a rate hike might derail economic growth prospects.

And there are still too many risks to economic growth, including strikes.