Inside Insights 14 December 2009

Investment Intelligence|Inside Insights

A weekly, in-depth yet concise report on the most important recent market movements and economic developments.

Added on 14 December 2009 @ 10:45 AM

Greek tragedy almost brings markets to tears

Greece's mounting debt problems finally came to a head when its sovereign credit rating was downgraded last week. Greece, a member of the European Union, now has the same rating (BBB+) as South Africa, a developing country. Spain had its credit rating placed on a negative watch, while Ireland managed to keep its creditors happy (for now) by announcing harsh cuts in spending - and higher taxes - even though the economy is still mired in recession and deflation. Unlike these countries, we are fortunate in South Africa to have entered the crisis with household, corporate and especially government balance sheets in fairly decent shape. The Greek and Spanish rating moves, coming in the same week that Dubai World subsidiary Nakheel revealed the full extent of its problems (a $3.6bn loss for the first half of the financial year) shook markets. Worries also re-emerged over the shape of the global recovery. Japan, for instance, would not be announcing a fresh $81bn fiscal injection if it was not worried about slipping back into recession. Nor would President Obama be pushing for a further $200bn in job-creating initiatives.

The rand weakened on the increased global risk aversion, falling to levels around R7.55/$. Fortunately for motorists, oil prices were also softer last week - somewhat offsetting the weaker rand - due to data showing oil inventories in the US were surprisingly large.

While the first three days of the week saw red on market boards, things improved from Thursday as data revealed a narrowing of the US trade deficit, while the 4-week moving average of US jobless claims data fell to the lowest level since September 2008. Strong economic data out of China gave markets a further shot in the arm. Generally speaking, equity and currency markets have been range-bound the past few weeks, though prone to episodes of doubt and euphoria. Going into the festive season, thinner trading volumes could result in higher volatility. For a sustained break out of the range, we'll probably have to wait for next year to come; 2010 is bound to be interesting.

Local recovery uneven but gaining momentum

Apart from the global developments, the local market also had to contend with a flood of economic data releases which, as expected, painted a picture of an uneven recovery. According to StatsSA, real retail sales continued to decline on year-on-year basis in October (-6.5%), although the month-on-month trend improved (2.8%). A clearer trend is visible in the manufacturing sector, where the decline has bottomed out. Manufacturing production continued to improve in October, although production levels are still 9% below the levels achieved in the same month last year. Compared to September 2009, though, production rose 5.8%. However, mining production levels were 8.5% below October 2008, despite the strong gold price - indeed, gold production fell 2.1% in the three month period to October, compared to the previous three months - but better than September's -15.9% (year-on-year) shocker.

The Reserve Bank also released its third quarter Quarterly Bulletin last week, containing a number of important indicators. It showed that household consumption expenditure fell by 2% during the quarter, a slower pace than the 6.1% decline in the second quarter. The reasons include rising unemployment and high levels of indebtedness. Though significantly lower due to interest rate cuts, the cost of servicing debt still consumed 8.5% of household disposable income in the third quarter. The household debt-to-disposable income ratio declined slightly to 79% in the third quarter from 80.1%. In other words, it will still take some time for the consumer to make a comeback and for the full impact of interest rates to be felt, probably only into the second quarter of next year.

The Bulletin also showed that the current account deficit continued to improve in the third quarter to 3.2% of GDP from a revised 3.4% in the second quarter, largely due to an improved trade surplus. This should be positive for the rand over the medium term, as our vulnerability to sudden, large capital outflows is reduced. Lastly, fixed investment (gross fixed capital formation) fell 4.1% during the quarter, as public infrastructure spending was unable to make up for the slump in private investment activity.

The Week Ahead

Despite the nearing festive season, a public holiday on Wednesday and many already away on leave, it will be a busy week from a data point of view, with key global events also taking place, such as the Copenhagen climate change summit.

StatsSA releases November consumer price index (CPI) data on Tuesday. Annual growth in CPI moved into the Reserve Bank's 3%-6% target range in October, largely due to a large fuel price cut in October. However, from November to January, petrol inflation is expected to be significant given the low statistical base that was formed during the same period last year, and is likely to push CPI inflation out of the target range. Inflation is only expected to move into that range on a sustainable basis in the second quarter of next year.

StatsSA will also release building plans passed data for November on Tuesday.

On Wednesday, the Federal Reserve's Open Marker Committee, the US's monetary policy body announces its decision on short-term interest rates. Also on Wednesday, Norway's central bank, one of the first to start raising interest rates, holds a meeting on interest rates, as will the Swedish central bank.

StatsSA releases November producer price index (PPI) data on Thursday. PPI growth was negative in October of the sixth consecutive month, reflecting year-on-year declines in food and commodity prices as faced by producers. However, PPI declined at a slower rate in October, and this trend is expected to have continued in November.

Also on Thursday, Fed Chairman Ben Bernanke faces a Senate vote on whether he will serve a second four-year term. While the Senate is expected to confirm his reappointment, failure to do will upset a market that is greatly geared to Bernanke's policy of near-zero interest rates.

The Bank of Japan holds its monetary policy meeting on Friday.

Fairbairn Capital | Old Mutual

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