Market Commentary




3Q19 Market Commentary

By Bongani Ngwanya – Money Market Portfolio Manager and Head of Dealing

The South African Reserve Bank’s (‘SARB’) ability to cut interest rates to boost the economy is limited by political and policy uncertainty and inflation that’s still not sufficiently anchored at the midpoint of its target range. That’s partly due to deteriorating fiscal metrics caused by bailouts for state-owned companies such as Eskom, the central bank said in its bi-annual Monetary Policy Review. The SARB is being cautious due to the upcoming Medium Term Budget Policy Statement (‘MTBPS’) in October and Moody’s credit review in November. Prior to the September Monetary Policy Committee meeting, the forward rate agreement market was pricing in a 60% probability of a 25bps reduction in the repo rate before year-end but has since reduced those expectations to a 40% probability. If, however the MTBPS lacks the structural reforms and expenditure cuts desired by the credit rating agencies, we can all forget about getting any rate cuts for the foreseeable future.

Internationally, the US/China trade negotiations and Brexit are still the key unresolved risks. The International Monetary Fund has reduced its global growth forecast to a post global financial crisis low of 3.2% for 2019. The World Bank has taken it a step further and slashed its global growth estimate to 2.6% for 2019. The trade war has caused a rapid slowdown in trade and manufacturing due to a decline in investment and weak confidence levels. The World Bank notes that 90% of the world is seeing slower growth in a synchronised slowdown as opposed to two years ago when growth was accelerating across three-quarters of the globe in a synchronised upswing.

The US Federal Reserve (‘Fed’), last month, cut their target rate by 25bps to 2% in what they called an “insurance cut”. What were they insuring against? Weaker global growth and trade war induced uncertainty. The fed funds futures markets are pricing a 82.2% probability of another 25bps cut at the end of October. In August, the European Central Bank (‘ECB’) reduced their rate by 10bps to -0.50% and took it a step further by announcing that they would embark on a new quantitative easing programme to buy €20bn in assets monthly from November. The ECB too spoke of low and slowing growth. The Bank of England (‘BOE’) left their rates unchanged at 0.75%. Given all the Brexit twists and turns, the BOE didn’t really have much of a choice.

September was a turbulent month for the Rand. It strengthened over 4% in the first two weeks of the month, buoyed by expectations of further monetary policy stimulus from the ECB and the Fed. However, sentiment changed midmonth post the Saudi oil refinery drone attack, tensions in US/China trade negotiations and the Fed downplaying expectations of a deep cutting cycle. The currency ended basically flat against the US dollar, weakened by 1% versus the British Pound and strengthened almost a percent against the Euro.