Inside Insights 27 July 2009

Investment Intelligence|Inside Insights

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

Added on 27 July 2009 @ 10:47 AM

Return of risk appetite

The JSE's All Share index broke through the 24 000 points level in Friday intraday trade, before falling back a bit. The All Share still ended the week 1.7% up, closing at the highest level this year. Over the past 10 trading days (two weeks) the Alsi ended 8 in the green. Elsewhere, the Nasdaq posted 12 consecutive daily gains, the most since 1992. Better-than-expected results from several major US corporates (including 3M, AT&T, Apple and Starbucks) spurred global markets higher, although some companies disappointed with their results (such as Wells Fargo and Goldman Sachs), resulting in choppy trade during the week. The Dow reached its highest levels since November 2008, and the S&P500 broke through the technically significant level of 960. Apart from better corporate earnings, markets also reacted positively to US existing home sales rising 3.6% in June, the 3rd consecutive monthly increase. On a year-on-year basis, sales fell -0.2% (following the -3.6% in May). In other words, the US residential property market is stabilising, not recovering yet. But evidence of stabilisation has been enough to further boost equity markets and cool demand for safe-haven assets such as the yen, dollar (see below) and US Treasuries. Good news also came out of the UK, where June retail sales rose more than expected, partly due to lower prices (something South African consumers are not benefiting from that much yet) and Japan, where year-on-year exports fell ‘only' 35.7% in June, an improvement from previous months. However, macro-data has not been uniformly good: Eurozone industrial orders declined 30.1% year-on-year in May, worse than expected, while UK GDP fell 0.8% in the second quarter, also worse than expected. Given that the Europe is South Africa's biggest trading partner, the continued contraction will affect local industry negatively.

Lastly, US Federal Reserve Chairman Ben Bernanke's testimony to Congress had little impact on markets. He emphasized that the economic outlook was improving, but that rising unemployment risked subduing the recovery. Bernanke also made it clear that the federal funds rate - the official interest rate - would remain close to zero for an extended period.

Inside Insights 27 July 2009_SA Equities since January, rebased to 100

Rand rampaging again

The rand hovered around R7.70/$ last week, even strengthened briefly to an intraday best of R7.61/$. It remains the second-best performing currency against the greenback year-to-date, up 19.7% (the Brazilian Real is up 22.74%). The increase in global risk appetite over the past week saw investors sell the dollar to invest in emerging market assets. Commodities such as gold bullion and crude oil also strengthened in response to the weaker US dollar and hopes of an economic recovery. The Brent crude oil price finished the week 7.9% up at $69/barrel, and the gold price 1.6% up at $952/oz This in turn boosted commodity-producing currencies such as the Australian and Canadian dollars. The rand also responded very favourably to the appointment of widely-respected Gill Marcus as the new governor of the Reserve Bank. Perhaps the biggest positive for the rand has been speculation that Bharti, India's biggest mobile-phone company would purchase a stake in MTN following confirmation from Bharti management that they intended pursuing the transaction. If concluded the deal would result in large flows of capital into South Africa, supporting the rand. However, this deal has not yet been finalized, so perhaps un-hatched chickens are being counted.

Either way, if the rand remains at current strong levels, a further interest rate cut could be on the cards, especially if we start seeing signs of inflation cooling meaningfully(finally) in next week's June CPI and PPI numbers, and if data out of the real economy remains weak. The next MPC meeting is on the 13th of August.

The Week Ahead

StatsSA releases June inflation data this week: CPI on Wednesday and PPI on Thursday. Inet's consensus expectation is for consumer inflation (as measured by growth in CPI) to have moderated to 7.2% year-on-year from May's 8%, as base effects (in other words the high levels of a year ago) start to push transport and food inflation down. Producer inflation (as measured by growth in PPI) slowed to -3% year-on-year in May from April's 2.9%. PPI is generally more sensitive to changes in commodity prices while (the new) CPI is more sensitive to service prices. The sharp fall-off in commodity prices since mid-2008 has thus impacted PPI to a far greater extent.

The Reserve Bank will release money supply (M3) and private sector credit extension (PSCE) growth numbers for June on Wednesday. Money supply growth is expected to have slowed down from 7.3% year-on-year in May to 6.8%. The Inet consensus forecast for PSCE is only 3.9% year-on-year, down from May's 5.7%. This number should be compared to annual credit growth over the previous few years in the 20%-30% range to get an idea of how sharply banks have cut back lending, on the hand, and how demand for credit has dried up on the other.

After taking its lead from US markets, the JSE can now focus on matters closer to home as the local results season kicks off in earnest. This week sees interim results from Sappi, Mutual & Federal, AECI, Anglo Platinum, AngloGold and Anglo American plc, and a trading update from SABMiller.

Fairbairn Capital | Old Mutual

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