Inside Insights 26 April 2010

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

Added on 26 April 2010 @ 9:59 AM

Still all about Greece

The week started under a cloud, and it wasn’t just from the Icelandic volcano. The announcement the previous Friday that Goldman Sachs, an American investment bank that emerged relatively unscathed from the credit crisis, would face fraud charges for its role in marketing a dodgy mortgage-backed security caused global equity markets to tumble on Monday, and the volatility index (VIX) to spike. As usual, a whole range of risky asset classes, including commodities and emerging market currencies, sold off. However, while many were still grappling with the implications of the charges against Goldman (not least Goldman shareholders), it did not take long for focus to shift to the ongoing US corporate earnings season and Greece’s debt woes. On the former, Citibank, Morgan Stanley, Starbucks and Apple delivered solid performances. Ironically, Goldman itself also announced stellar profits, beating analyst expectations. Weighing on the market was below-expectation results from cigarette maker Philip Morris, IBM and eBay. US Economic data was mixed with the leading indicator for March rising for the 12th consecutive month by 1.4% month-on-month, to a record high of 109.6 index points, higher than market expectations of a 1.0% month-on-month increase, and new home sales were up 23.9% year-on-year. However, durable goods sales for March were disappointing, falling by 1.3% month-on-month.

Across the Atlantic, German investor sentiment showed a strong gain in April according to the ZEW survey. The index, which is based on the views of 288 analysts and professional investors, rose to 53.0 from 44.5 in March, beating expectations of 46. This was the ZEW index’s first monthly gain after six consecutive declines. But even the positive news from Europe’s biggest economy could not overshadow the turmoil faced by one of the eurozone’s smallest economies, Greece. Interest rates on Greek debt spiked during the week, with two-year bond yields rising to 10.6% when new data showed that Greece’s budget deficit was higher than though previously at 13.6% of gross domestic product (GDP) and rising, with the debt to GDP ratio at a staggering 122%, while Moody’s downgraded Greece’s rating. Greece had no choice but to formally request financing from the joint IMF-EU loan mechanism. In the process, the euro extended losses and the rand followed it lower, hitting a 7-week intraday low against the US dollar of R7.50/$. However the rand received some support when SARB governor Gill Marcus hinted at a conference that the local rate cutting cycle had come to an end, with the repo expected to remain stable for the foreseeable future.

Economic growth outlook upgraded

The International Monetary Fund (IMF) released its updated global economic forecast during the week, and for the most part the outlook has improved from its previous forecasts. The IMF expects the world economy to grow 4.2% this year, revised up from 3.9% in January, led largely by a strong showing from China (10% expected) and India (8.8%) and indeed the Emerging Market countries as a whole (6.6%). The Fund said that the Advanced Economies would grow by 2.3%, led by the US, which was recovering faster than Japan and Europe (with the likes of Spain and Greece expected to contract further this year). Global growth is expected to accelerate to 4.3% in 2011. However, the IMF highlighted that it was still concerned about ballooning government debt in the developed world, high unemployment, the fragility of the financial system and global imbalances. In terms of the South African economy, the IMF expects growth of 2.6% this year, an improvement on its previous forecast of 1.7%, made in October 2009. While the IMF warned that high unemployment, tight credit and a strong rand would be a drag on the recovery, it still expected the economy to grow by 3.6% in 2011, above the current Reuters consensus estimate of 3.5%.

Meanwhile, an updated study on the expected economic impact of the Fifa World Cup was released during the week. According to consultancy Grant Thornton, around 370,000 foreign visitors are expected during the tournament, down from the 480,000 expected before the global recession hit. However, visitors are now expected to stay longer and spend more than was thought before. This would amount to a R93bn injection into the economy, with a positive impact on GDP of around 0.5% in 2010.

The Week Ahead

The South African Reserve Bank (SARB) releases its composite leading indicator on Monday.

South African markets will be closed on Tuesday for the Freedom Day public holiday.

StatsSA releases March consumer inflation (CPI) numbers for March on Wednesday, and producer inflation (PPI) for Thursday. According to an I-Net Bridge survey, the consensus economist expectation is that CPI slowed to 5.1% year-on-year in March from 5.7% in February due to lower food price inflation and the stronger rand. PPI is expected to have increased to 3.9% year-on-year in March from 3.5% in February. The rand was 25.6% stronger in March than in March 2009, helping keep the cost of imported inputs in check. At the same time, March’s oil price was up around 70% from the same period last year, and up 7% compared to the previous month, resulting in producer inflation drifting upwards.

SARB releases private sector credit extension (PSCE) and money supply (M3) growth numbers for March on Friday. Credit extension has been negative since October 2009, and another small negative reading is expected, as demand fro credit remains low while consumers focus on paying off debts. Money supply is expected to have grown marginally in March by 0.7% year-on-year.

SARS releases trade balance numbers for March on Friday.

Globally, US consumer confidence statistics will be published on Tuesday, and the Federal Open Markets Committee (FOMC) announces its interest rate decision, in all likelihood unchanged. German unemployment data on will be released on Thursday. Friday sees the release of Q12010 US GDP numbers, eurozone inflation and unemployment data, and Japanese inflation, unemployment and industrial production.

Fairbairn Capital | Old Mutual

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