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Monthly Market Wrap - September 2009
Added on 05 October 2009 @ 10:34 AM
Market highlights
September marked the one-year anniversary of the collapse of giant investment bank, Lehman Brothers. Its collapse triggered an international financial crisis and with it the second worst global recession in history. The subsequent twelve months were highly volatile, and uncertain. However, global equity markets have bounced back with surprising vigour from the low levels in March, as investor focus shifted from economic data to corporate earnings and now recovery hopes. According to the International Monetary Fund's latest World Economic Outlook, the global economic growth has turned positive, supported by unprecedented and globally coordinated government stimulus efforts. The IMF revised its forecast for global growth for 2009 to -1.1% , slightly up from -1.4% while it now projects global growth of 3.1% in 2010. However, the IMF also emphasized that the recovery is expected to be slow given that government spending is currently propping up major economies, that households are straining under a debt burden which would have to be slowly repaid, and the financial system - while healing - was still impaired.
With light at the end of the tunnel, the central banks of the US and Euro-zone announced that they will be scaling back their efforts to purchase bonds to drive down yields (although they also emphasized that interest rates would remain low). This dented sentiment as investors worried that removing stimulus would be a policy error as the recovery is still in a fragile state, with unemployment still rising and consumer demand still depressed. Despite these bouts of negative sentiment, the Dow Jones rose 2.3%, the S&P 500 added 3.6% and the NASDAQ climbed 5.6% for the month. While historically September has been a miserable month for US markets, September 2009 clearly was not. Over the quarter, the Dow added 15% - its best quarterly performance since 1998, while the S&P500 and NASDAQ gained 15% and 15.7% respectively.
The JSE's All Share index ended the month flat, with volatile commodity prices and the impact of a stronger rand proving a drag on the local bourse. The spot price of gold moved around the $1000 dollar per ounce mark, but failed to make sustained gains above that key level during September. The rand averaged R7.49/$ in September and hit its best daily level against the dollar so far this year during the month - R7.30/$. This was partly due to a globally weaker dollar and partly due to the expected merger of MTN and India's Bharti Airtel, which would have seen billions of dollars flow into South Africa. However, in the last trading session of the month, it was announced that the deal would not go ahead. The rand immediately lost ground on the news. Nonetheless, even at the month-end level of R7.51/$, the rand is quite strong and poses a threat to recovery in the exporting sectors.
Against the backdrop of a global manufacturing recovery, the latest manufacturing data suggested that SA's second-largest sector is finally bottoming out, even though year-on-year growth is still deep in negative territory. Manufacturing production declined 13.7% year-on-year in July, up from June's year-on-year figure of -17.2%. Mining production increased 4.8% year-on-year in July, but gold production fell 7.6% year-on-year despite the firm dollar gold price.
The latest retail sales data emphasize that weakness is not confined to the export sectors. Retail sales fell 3.9% year-on-year in July, but at least this was better than June's revised -6.7%. This bottoming out in spending suggests that the 500 basis points cumulative reduction in the repo rate is slowly starting to take effect. However, there is very little evidence of renewed borrowing on the part of consumers, suggesting that households have been using the extra money to pay off debts.
Inflation continued to ease in August to 6.4% year-on-year, from 6.7% in July, as lower producer prices started filtering though. Consumers will be particularly pleased that food inflation has come down from double digit level to 6.1% in August. However, while goods inflation has slowed, partly with the help of a stronger rand (showing the double-edged nature of currency movements), services inflation continues to be well above the 3%-6% target range and continues to be a threat to the inflation outlook (especially Eskom's tariff hikes over the near term). Above-inflation wage settlements also clouds that outlook. Taking all these factors into account, Reserve Bank Governor Tito Mboweni concluded that, while domestic activity remains under pressure, the rate of contraction is slowing, with signs that the economy is bottoming out. As a result, SARB's Monetary Policy Committee decided to leave the repo rate unchanged at 7.0%.
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