Inside Insights 21 September 2009

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

Added on 21 September 2009 @ 4:12 PM

One year later…

This week marked the one year anniversary of the collapse of investment bank, Lehman's Brothers. Its demise left the financial world in tatters, and halted world economic growth. One year later, major economies are still grappling to emerge from recession, as unemployment, depressed consumer spending, weak manufacturing output and low consumer confidence levels are some of the factors hindering the recovery. However over the past few months, there have been tentative recovery signs from developed economies such as US, Germany, Japan and France, including significant gains in financial markets. The pace of the recovery has been as impressive that the gains made year-to-date. Since the low levels in March, the S&P500 has gained 51%, the FTSE 100 44%, the Shanghai Composite 47% and the JSE All Share 39%.The past week echoed this performance, as international equity markets hit some of their highest levels this year. The rally was fuelled by positive statements from Fed Chairmen Ben Bernanke stating that the recession is probably over, whilst Warren Buffet added that the Financial crisis has bottomed out- these comments increased risk appetite. The S&P 500 had its best close in 12 months whilst the FTSE 100 remained above the key 5000 level. Most importantly was China's main index crossing the key 3000 resistance level, as the government seems set on attaining 8% growth by year end. This means that China will maintain its appetite for commodities to support industrial expansion and provide a boost to commodity producing emerging markets like South Africa.

Rand remains resilient

Currencies in general are difficult to forecast, more so for emerging market currencies which are at the mercy of foreign investor sentiment. The rand is a particularly difficult currency to forecast and those who attempt to predict the direction of its trajectory usually get it wrong. The rand's continued strengthening continues to surprise many and frustrate exporters whose products become less competitive. The rand is currently trading below the R7.50 level to the dollar and since the start of the year it has gained 20.5% against the Dollar, 15.8% against the Euro and 10.8% against the Sterling. The strong rand can be attributed to several causes - the significant decline in our current account deficit to 3.2% of GDP in the second quarter from 7% in the first quarter due mainly to a decline in imports caught the market by surprise. Increasing risk appetite has resulted in portfolio flows to the tune of around R57bn into our equity market since the start of the year, in contrast to the R54bn disinvested in 2008. Moreover, dollar weakness has added to the rand appreciation and fuelled the gold price which has breached the US$1000/oz mark. The rand is often sensitive to gold price, strengthening along with gold price increases. Also, our nominal interest rate of 7% is well above the rates available in many developed economies and enticing for those seeking a higher yield. There are certainly reasons to be positive about the strength of the rand, one being favourable terms for offshore investments.

The Week Ahead

The SARB Monetary Policy Committee meeting commences next week, with the interest rate decision to be announced on Tuesday afternoon. The SARB surprised with a 50 basis point cut at the previous meeting, however they are most likely to leave the current repo rate unchanged at 7.0%.
StatsSA will release inflation data for August next week. CPI is expected to have receded to 6.4% year-on-year (y/y) in August from the 6.7% increase in July, according to a survey of leading economists by I-Net Bridge.
StatsSA will also release July retail sales figures next week. After an impressive recovery of -4.4% year-on-year in May, retail sales slumped in June to -6.7%. Households remain cash-strapped despite significant rate cuts. If both retail sales and inflation numbers fall further than expected, there could arguably be room for a further interest rate cut.
SA Markets closed for Heritage day on Thursday the 24th of September.

Key Indicators - Please also visit our website for up-to-date indicators

Market	Index	Closing Value @ 18/09/2009	% Change 1 week	% Change Year to Date
Currency	Rand/US$	R7.39/$	+0.3%	+20.5%
	Rand/GBP	R12.04/£	+2.4%	+10.8%
	Rand/Euro	R10.91/€	-0.8%	+15.8%
	US$/GBP	$1.64/£	+1.2%	-12.8%
	US$/Euro	$1.47/€	-0.7%	-5.6%
	Yen/US$	¥91.08/$	+0.7%	+0.8%
JSE	All Share	25792	+0.9%	+18.5%
	Top 40	23190	+0.8%	+17.8%
	Financial 15	7133	+2.1%	+19.6%
	Resources 20	46501	-1.0%	+15.8%
Bonds	All bond	299.2	+0.0%	-1.0%
	R153 (yield)	7.42	-0.1%	+1.6%
US	S&P 500	1067.55	+2.0%	+14.6%
	NASDAQ	2130.78	+2.1%	+30.5%
Japan	Nikkei 225	10370.54	-0.7%	+17.1%
UK	FTSE 100	5172.89	+3.2%	+13.4%
Emerging Markets	MSCI	879.94	+0.0%	+51.5%
Brent Crude Oil	Spot $/barrel	70.41	+1.7%	+61.7%
Gold	Spot $/oz	1011.4	+0.5%	+15.4%
Platinum	Spot $/oz	1334	+1.7%	+40.6%

Fairbairn Capital | Old Mutual

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