Good day,

Herewith the latest edition of the Monthly Insights. We trust that this will contribute to a broad overview of the interest rate, currency and financial markets. Please feel free to address any questions or comment on the contents to the undersigned.

Executive Summary

  • SA GDP now looks set to grow by around 2 % q-o-q on a seasonally adjusted annualised basis in the second quarter. As a result, we have revised our GDP forecasts up slightly, with the economy forecast to be flat in 2016 as a whole, marginally better than -0.1 % predicted last month. We are less bearish than consensus on the current account, and expect the deficit to narrow to around 3.6 % of GDP in 2016 as a whole, down from 4.3 % in 2015.
  • Consumer inflation drifted higher in June, rising to 6.3 % y-o-y. We expect inflation to peak at around 6.8 % at the end of the year and then ease off a higher base, dipping below the Reserve Bank’s upper 6 % inflation target around June next year. The SARB decided unanimously to leave its repo rate unchanged at 7 % in July, but maintains that the risks to the inflation outlook remain to the upside and that global risk appetites could reverse quickly given the current uncertain global environment. This echoes our own view. We remain wary of the threat of further downgrades to the country’s sovereign risk ratings. For now, we still believe that one or two hikes of 25 basis points each in late 2016 or early in 2017 are possible, for a peak in repo of between 7.25 % and 7.50 %.
  • Despite the absence of any positive structural changes in the local context, the risk-on has supported the 5-year CDS. At current levels, our view is that the CDS are not adequately pricing in the socio-economic and geo-political risks inherent in South Africa. We would view a CDS spread on SA of around 320bps as more reflective of both the inherent credit as well as socio-political risks which remain on the agenda. Large foreign holdings of domestic debt introduce an additional layer of vulnerability in the event of a reversal in global risk appetites.
  • The International Monetary Fund (IMF) revised its global growth forecast marginally down in July, this on account of the probable negative impact of Brexit on confidence, trade, investment and economic growth in both the UK and the Eurozone. The Fund expects the world economy to grow by a slightly softer 3.1 % and 3.4 % in 2016 and 2017 respectively, compared with April’s projected growth rates of 3.2 % and 3.5 % respectively.
  • Global monetary policies remain accommodative. The FOMC left the Fed funds rate unchanged at 0.25 % but was more upbeat about US growth prospects. The Bank of England (BoE) and European Central Bank (ECB) surprised the markets by keeping policy largely unchanged for now, while the BOJ also disappointed the markets’ stimulus expectations. So far this year, a total of 34 central banks have eased their monetary policies, while 17 have tightened. We believe the Fed is more likely to act in 2017, as they may first wait to assess economic data and global risks into the year-end.
  • The rand appreciated by 4.1 % against the trade-weighted basket of currencies. Based on our estimates of purchasing power parity, the rand is currently about 11 % undervalued. The rand has been among the best performers this year given its high beta emerging market status and liquidity. The rand is now even more overbought in the short term in our view, and suggests that tactically we would now prefer outright rand-shorts against the dollar at current levels, with a risk mitigating stop loss view around R13.60/$. This would indicate a sustained push below the current R13.85/$ handle.
  • We remain wary of a high degree of complacency in global risk assets, but are also cognisant of the fact that global policy makers appear to be on a coordinated push to ensure no financial market dislocations, which could in turn spill over to the real economy and cause a recurrence of the financial crisis. This overarching interventionist policy appears to be holding the fort for now. We continue to watch risk flags which may signal a shift back toward EMs on a longer term scale, as many indicators are currently testing resistance at current levels.