Inside Insights 21 June 2010

Investment Intelligence|Inside Insights

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

Added on 21 June 2010 @ 11:01 AM

World markets stabilise, gold shines

With local attention squarely focused on the trials and tribulations of Bafana Bafana, many might have missed the improvement in global sentiment over the past few days. Following strong demand in a Spanish bond auction on Thursday, which showed that investors still had some confidence in the eurozone’s economic outlook, European stocks extended a 7-day rally to end the week 6% up. BP was the strongest gainer this week, up 6.7% after agreeing to set up a $20bn damage claim fund from its Gulf of Mexico oil spill and also suspending dividend payments, removing uncertainty. However, BP’s share is still down more than 45% since April. Another important development in Europe was the announcement that the results of ‘stress tests’ of European banks’ balance sheets will be announced in July. The announcement of stress-test results showing that US banks were in decent shape in February of last year was a key spark to get the relief rally of 2009 going.

However, the market’s gains were capped by some disappointing economic data from the other side of the Atlantic. The Philadelphia Fed’s June index of business activity for factory operators in the Mid-Atlantic area fell to 8.0, from 21.4 in May. Adding to the negative sentiment, the Conference Board’s index of leading economic indicators only rose 0.4% in May, much less than expected, while new claims for jobless aid rose last week. Finally, US consumer inflation fell to a 1½ year-low in May. This dampened expectations that the US Federal Reserve would increase interest rates sooner, causing a pull-back in the dollar. This also caused commodity prices, including oil, to fall back as it once again called into question the strength of the recovery in the world’s largest economy. The uncertainty over the US recovery, a weaker dollar and sovereign risk in Europe has been good for the gold price, though. Gold reached an all-time record high of $1256/oz. The price of an ounce of gold has increased almost 15% this year, outperforming stocks, bonds and other commodities. The JSE followed global markets higher, and was also supported by the futures close-out. Futures close-outs occur every three months, typically resulting in higher trade volumes. The rand followed the euro in strengthening against the US dollar.

Consumer slowly coming back

The BER consumer confidence index (CCI), sponsored by FNB, was slightly down at 14 in the second quarter. This follows a sharp surge from 6 to 15 in the first quarter (similarly to the business confidence index we discussed last week; see graph). Respondents in the CCI survey were asked how positive they felt over their own finances, whether they thought the present was a good time to purchase durable goods, and if they expected general economic conditions to improve or worsen over the next 12 months. In terms of answers, fewer consumers than in the first quarter felt their own finances would improve, a situation attributed to the difficult jobs market. Most consumers also felt that it was inappropriate to buy durable goods at the present time, despite the prime rate being at a 30-year low and the prices of many imported durables being competitive due to the strong rand. However, the number of respondents who felt the economy would improve over the next 12 months increased compared to the first quarter. The feel-good factor associated with the Fifa World Cup probably played a role. At the same time, the uncertainty in global financial markets, which also washed up on our shores, put a dampener on consumer sentiment.

While consumer confidence is quite high by the historic standards of the CCI (whose highest ever index level was 23 in March 2007), actual spending by consumers has been slow to increase since the recession. Nonetheless, real retail sales numbers released by StatsSA showed an 3.2% year-on-year increase in April, compared with a revised 2.7% increase in March, higher than most economists' expectations of around 2.1%. This improving trend is likely to continue but the heavy household debt burden will act as a drag on recovery. StatsSA’s revision of its historical data suggests the recession in retail spending lasted longer than previously thought, with sales being negative on a year-on-year basis every month between February 2009 and February 2010. However, the adjusted data also showed that the recession was not as deep as previously thought.

The Week Ahead

• A busy week ahead in terms of local data. On Tuesday StatsSA releases the results of the Quarterly Employment Survey, containing earnings and employment data.

• Local inflation data for May will be released by StatsSA this week. Consumer inflation data, (measured as the year-on-year change in the Consumer Price Index) on Wednesday fell to 4.8% in April. According to Reuters, the consensus expectation is that consumer inflation fell to 4.6% year-on-year in May, largely due to lower food inflation and a stronger rand (while the rand is flat year-to-date against the dollar, on a trade weighted basis it has appreciated about 4%. Producer inflation is likely to have increased from 5.5% year-on-year in April to 7.2%.

• The Reserve Bank releases its Quarterly Bulletin for the first quarter on Thursday, containing the latest data on the demand side of the economy - household consumption (StatsSA is responsible for supply side or industry-level data). It also contains data on the household debt burden, debt service cost and savings rate. The debt-to-income ratio increased to 79.8% in the last quarter of 2009, and is expected to remain high, even if it has reduced somewhat. The QB also contains the latest current account deficit numbers, which have the potential to influence the rand. The current account narrowed to 2.8% in the final quarter of 2009, but is expected to have increased slightly in the first quarter due to the economic recovery. Finally, the QB contains investment (capital formation) data, which is important given the short and long-term impact of investment on economic activity.

• Global data releases of note: Japanese All industry activity index; Eurozone April current account data and consumer confidence numbers; Germany’s Ifo survey; US new home sales for May.

Fairbairn Capital | Old Mutual

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