Inside Insights 6 Dec 2010

Investment Intelligence|Inside Insights

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

Added on 06 December 2010 @ 10:23 AM

More pain at the pumps?

Most global equity indices ended in the black, despite an inauspicious start to the week. The €85bn Irish bail-out package failed to convince bond markets, with yields on Irish, Portuguese, Greece, Spanish and Italian debt still at elevated, though slightly lower levels. The euro also failed to make significant gains against the dollar. To calm markets, the European Central Bank announced that it stood ready to supply unlimited liquidity to banks. However, despite speculation of a change in direction, it stopped short of announcing a quantitative easing programme of large-scale European bond purchases - the so-called ‘nuclear option'.

Equity markets mostly focused on the other side of the Atlantic, where economic data came in ahead of expectations. Pending US home sales jumped unexpectedly in October, November retail sales surprised on the upside, while the Conference Board's consumer confidence index rose to a 5-month high of 54.1. US private sector employment improved by more than expected in November, according to the monthly ADP report. However, official Labor Department data out on Friday showed a rise in the unemployment rate to 9.8%, from 9.6% in October.

Another development worth watching closely is the surging crude oil price - and commodity prices in general. Higher oil prices are normally associated with a weakening dollar, but as the chart shows, the price of a barrel of Brent crude has risen substantially over the past few weeks, despite the dollar strengthening against the euro. Instead, positive economic news is what seems to have driven crude oil above $90/barrel. Local motorists - who have already had to deal with successive petrol price hikes - should brace themselves for more expensive fuel, though fortunately the strong rand is softening the blow. A nightmare scenario would be a repeat of early 2008, when a weakening global economy was tipped over the edge in part due to record high oil prices, caused in turn by cheap money finding its way into commodity markets and investors betting on insatiable demand from China. Sound familiar?

Positive PMIs

For the first time in several months, local manufacturers have received good news. The Kagiso purchasing managers' Index (PMI) increased to 52.9 in November, after spending two months below the key 50 index points level that separates expansion from contraction. Encouragingly, the new sales orders sub-index jumped to a seven-month high of 56.5. The employment sub-index also improved, but only to 47.6, meaning factories are still shedding jobs. In a separate survey, the Bureau for Economic Research's fourth quarter manufacturing survey showed that confidence in the sector improved by 11 index points to 41. However, the local manufacturing sector remains under pressure, with demand in developed economies still weak and the rand strong. Local demand is improving, but only slowly.

After hitting a mid-year wobble, the JPMorgan Global manufacturing PMI continued to rise in November, to 53.9, from 53.7 in October. In the US, the manufacturing sector slowed slightly in November, with the ISM index slipping to 56.6 from 56.9 in October. The eurozone manufacturing PMI accelerated in November, rising to 55.3 from 54.6 in October. Once again, however, there was a divergence in performance from individual eurozone countries, with core economies Germany and France performing well, while PMIs for Greece and Spain remain stuck in negative territory. The UK's PMI rose to a 16-year high of 58.0 in November from October's upwardly revised 55.4, supported by economic recovery and a weak sterling exchange rate. China's official manufacturing PMI rose to a seven-month high of 55.2 in November from 54.7 in October, indicating that steps by Beijing to slow down the Chinese economy have not succeeded as yet.

The Week Ahead

• A week jam-packed with local economic data releases kicks off with November gold and foreign exchange reserves data on Tuesday.

• StatsSA releases October retail sales numbers on Wednesday.

• The Reserve Bank releases its Quarterly Bulletin for the third quarter on Thursday, containing the latest data on household disposable income, consumption and debt levels, fixed investment spending and the size of the current account deficit. The current account deficit is expected to have widened to around 3.2% of GDP, from 2.5% in the second quarter.

• Also on Thursday, StatsSA releases mining and manufacturing production numbers for October. Manufacturing production growth is expected to have risen to 1.9% year-on-year from 1.4% in September, in line with the slight improvement in October's PMI.

• The South Africa Chamber of Commerce and Industry releases its December business confidence index on Thursday.

• Global events and data releases of note: Japan Q3 GDP revision, October foreign trade balance, machine orders and bank lending; German October inflation, factory orders and industrial production; the Reserve Bank of Australia and the Bank of England's Monetary Policy Committees meet; US October consumer credit and wholesale inventories, December consumer sentiment; China November property prices, money supply and bank loans.

Fairbairn Capital | Old Mutual

Investment Intelligence|Inside Insights