Opinion / 23 September 2019, 11:30am / Chris Harmse
JOHANNESBURG - The announcement of the attack on Saudi-Arabia's main oil installation that destroyed 50percent of the country’s production capacity has destabilised stock markets and the currencies of especially emerging markets.
President Trump announced a step up in sanctions on Iran, increasing the fear of a Middle-East crisis.
Although the US Federal Reserve had decreased the US bank rate by 25 basis points, the more hawkish stance of the Federal Open Market Committee (FOMC), that it is not the start of a downward cycle for rates, also had negative sentiment on emerging market assets.
President Trump would rather see bigger cuts and tension between he and Federal Reserve chairperson Jerome Powell is building up.
The move by the Fed had led to US equities climbing a fourth straight week.
The S7P 500 index traded above the 3 000 level and was within 1percent of its July 26 closing record last Friday.
Domestically the effect of the sharp increase in the international oil price had a strong negative effect on the rand.
Together with the announcement by the Monetary Policy Committee that it will not decrease the repo rate, negative sentiment built up against the rand.
The currency depreciated strongly last Thursday and Friday. It seems that foreign risk investors now reckon that the Reserve Bank must lean against the wind to counteract the “chaos” on the fiscal side, given the debt situation of the SOEs, as well as the uncertainty on implementation of the Minister of Finance's proposed new economic strategy.
The extension of the medium term expenditure framework speech by one week to October 30 also made foreign investors nervous.
Criticism against the MPC arises from its contradictory statements on the risks present that avoided the lowering in the repo rate.
The main argument for not cutting the rate arises from the expectation that the inflation rate will increase again to 5.0percent next year on the back of a strong increase in prices for fuel, electricity and food.
The contradiction lies in the fact that nothing had changed from the previous meeting regarding the inflation expectation for next year (it was also 5.0percentpercent at the previous meeting) but inflation expectation for 2019 was scaled down from 4.4percentpercent to 4.2percent. Therefore the climate for a cut this time is more favourable than at the previous meeting when indeed the rate was lowered.
The MPC also reported that it is not worried about the current exchange rate and Governor Lesetja Kganyago at the press conference said the bank is not worried by the spike in the oil price after the Saudi incident and that its Quarterly Forecast Model (QFM) did not take it into consideration.
Therefore, one has to be sceptical as to why the MPC did not cut the repo rate.
The inflation rate during August had increased from 4.0percent in July to 4.3percent, with the increase in food prices the main contributor. Retail sales during July had increased by 2.2percent and indicate that consumer demand is improving.
On the JSE the nervousness of investors against risky assets from emerging markets, as well as the weaker rand had its toll. The Alsi lost over the week 718 points (1.3percent). The Industrial 25 benchmark index had shed 2.25percent, and the Financial 15 index decreased by 1.4percent.
The weaker rand and better global commodity prices helped the resources 10 index as it advanced only marginally by 0.2percent. The initial market expectations of a possible repo rate cut had boosted listed property shares during most of the week and helped the Listed Property index to end the week up by 1.5%percent.
The strong recovery of the rand against the major currencies the previous week was cut short due to the oil price saga and the decision by the MPC. The currency ended last week on R14.94/$ .This is 40 cents or 2.8percent weaker. Against the pound the rand depreciated by 51 cents from R18.16 to R18.67 late on Friday and the rand ended the week 44 cents weaker against the euro at R16.45.
Chris Harmse is Chief Economist at Rebalance Fund Managers.