Some calmness after global, domestic financial storms

MORE AND MORE evidence suggests that the South African economy and financial markets will have a normal year in terms of stability and recovering.

After the economy went into a recession last year, given the drought in the agriculture sector, as well as lower international prices for gold and platinum, sluggish exports and manufacturing production, pressure had mounted on South African Financial markets.

Given the strong increase in the international oil price during 2018, as well as a depreciation of 16 percent in the rand exchange rate, higher fuel and food prices have driven up the inflation rate in South Africa. This had paved the way for an increase in the interest rate by the Monetary Policy Committee in November.

The ongoing trade war between the US and China, four interest rate increases by the US Federal Reserve and uncertainty over global economic growth also contributed to volatile and negative share prices domestically. Since the beginning of January 2019 it seems that the global and domestic financial storm returned to some calmness. The more dovish approach towards further US interest rate hikes and a growing optimism that a trade agreement between the US and China is on the brink, had set the tone for more optimism towards stable and “normal” share, capital and money markets, especially for emerging economies.

Despite the ongoing Brexit saga, hope still prevails that a settlement between the UK and the EU will be reached. This more bullish sentiment had a positive impact on the South African share, bond and listed property markets with the rand exchange rate experiencing its most stable two-week periods in more than a year.

The more positive stance of the MPC at its meeting last week also contributed towards more optimism. Although the Monetary Policy Committee is still of the opinion that too much domestic and global risk exists that may push the inflation rate to the upside inflation target of 6 percent, the bank’s downward forecast of the inflation rate to 4.6 percent for 2019 is welcomed. Although many feel that the MPC had made an error in judgment in raising interest rates in November, expectations for no further cuts also support financial markets.

The disappointing decrease in mining production by 5.2 percent in November and retail sales that recorded 3.2 percent growth in November, far less than expected, given the large positive effect of Black Friday, indeed indicates that the South African economy is still in some stormy waters. Together with the uncertainty on Brexit, South African share markets as well as the rand exchange rate had moved rather sideways during last week.

On the JSE the Alsi had risen by a mere 78 points or only 0.14 percent over the week. The resources 10 index traded lower by a sluggish -0.02 percent, while the Industrial 25 board had improved slightly by only 0.3 percent over the week. Listed properties seem to continue to recover strongly. The index had gained 1.8 percent last week and is now already up by 3.6 percent since the beginning of the year. The rand exchange rate continues to move quite stable. During last week the currency gained 9 cents or 0.5 percent against the dollar or traded at R13.78/$ on Friday afternoon. Against the pound the rand almost did not change over the last two weeks and was only 2 cents weaker on R17.78 than a fortnight ago. Against the Euro the rand moved stronger to R15.66 against R15.92 a week ago.

This coming week investors will await the release of the South Africa’s inflation rate for December as well as for 2018 as a whole. It is expected that the consumer price index rate came down to 4.9 percent in December given the strong decrease in fuel prices at the beginning of the month.