Finally some positive news … the rand below R15/$ and the ALSI back above the 50k mark. By Garth Saunders
It was a month of two halves as oil rebounded 24% into the middle of the month followed by equities, gold and commodity currencies (CAD, AUD and ZAR). The conundrum of high inflation, slow growth and a possible ratings downgrade continued to be challenge for the South African Reserve Bank, who hiked rates by 25 bps. The US Fed seem to have a complete opposite set of challenges with continued low inflation, strong labour growth but fear of an unstable global market. The EU however are caught in the middle with low inflation and low growth enabling them at least to continue stimulating their economy by reducing rates and increasing the quantitative easing measures.
The USD was on the back foot against most markets as scepticism of a further rate hike in the next few months wanes. As a result, the EUR, JPY and AUD performed strongly, along with the ZAR, which strengthened 7.5% trading between 15.86 and 14.63. The GBP broke down below the key $1.40 mark but managed to stage a comeback, pulled higher by the EUR. However, it was by far the weakest performer breaking above EUR0.80 for the first time since November 2014. Closing rates for March: EUR ZAR R16.77 (‒3.1%); USD ZAR R14.71 (‒7.5%); GBP ZAR R21.13 (‒4.2%); EUR USD $1.14 (+4.7%); GBP USD $1.44 (+3.6%).
Global equities marched higher initially following oil but breaking away from the correlated trade mid-month as the continued their strong momentum. The ALSI struggled towards the end of the month. After initially touching as high as 53.824 it closed at 52.250. Closing levels for January: JSE ALSI 52 250 (+5.7%); Eurostoxx 3 006 (+3.1%); S&P500 2 066 (+6.2%); FTSE 6 180 (+1.7%).
The strong rand provided some relief to local yields helping swaps and bond yields to fall in spite of a 25 bps SARB rate hike and an annual inflation of 7%, well above the SARB’s 6% comfort zone. The market appears to have priced this in and is also giving local rates a breather as EU and Japanese rates fall and the Fed rate path appears less steep.
The Swap curve narrowed 27 bps on average across all tenors. The basis (difference between USD and ZAR Swap curves) curve narrowed on the short and long end 13 and 10 bps whilst staying relatively flat in the middle. The Forward rate curve indicates the next 25 bps SARB rate hike to be in June‒July.
Commodity prices have continued to build off their base and look set for further increases. Gold continues to attract safe haven demand and with rate hikes moved off the table it is cheaper to hold. Oil put in another strong show but remains extremely volatile with swings of 5% a day not uncommon.
Gold closed at $1 235 (+0,6%) and Brent crude at $38 63 (+16,3%).
YEAR TO DATE
The Eurostoxx index continues to lag down 8%. Oil has recovered almost all of its Q1 losses ending down 1%, while the S&P 500 index has also barely made headway with a 1% gain. Bonds and gold continue to see safe-haven buying with US 10-year note prices up 10% and gold up 16.0%. Although volatile, the rand is 5% stronger against the USD.
The markets seem indecisive at the moment, stocks have had a solid run but have failed to break to new highs, the USD continues to be on the back foot and has failed to recapture the momentum it had at the start of the year, and commodities appear to have based but are also struggling to breakout decisively to the upside. I’d be cautious in April as the Q1 earnings start coming through, it’ll likely be a catalyst … for bull or bear? Only time will tell …
AUTHOR | Garth Saunders, CA(SA), CFA