US policies on emerging markets remain disruptive
The minutes of the Federal Open Market Committee of the US released last Wednesday confirmed the hawkish outlook of the Federal Reserve and supported the press release of the chairman Jerome Powell a month ago that it was unlikely the US would cut interest rates further during the rest of the year.
Together with mounting negative sentiment around the Jackson Hole symposium in the US during the weekend, emerging market financial markets and currencies continued to contract. The Jackson Hole symposium in Wyoming was a strategic conference where US government officials, especially from the Federal Reserve, economists and bankers came together to debate the current economic climate and economic policy.
This year the theme was: “Challenges for Monetary Policy”.
Pressure is mounting on Powell in the light of fears of an economic downturn, volatile markets and criticism from US President Donald Trump.
Powell said: “We will act as appropriate to sustain the expansion, with a strong labour market and inflation near its symmetric 2percent objective.”
This remark led to many investors to believe that he was leaving the door open for another rate cut when the Fed next meets. US Stocks, however, opened Friday much lower.
Emerging markets stocks yet again suffered a week of losses.
On Friday, China also announced that it intended to impose additional tariffs on $75billion (about R1.1trillion) of American goods including soya beans, automobiles and oil, in retaliation for Trump’s latest planned levies on Chinese imports.
Despite the above negative outlook for emerging markets, the news last Wednesday that South Africa’s inflation rate recorded a level of only 4percent during July boosted shares and bond yield rates.
Although the subdued global sentiment had once again pulled down equities last Thursday and Friday, most indices ended the week higher.
The announcement by the Minister of Finance Tito Mboweni that he intended to cut government expenditure by between 5-6percent next year and by between 6-7percent the following two years also helped bond rates and the rand.
Chris Harmse is the chief economist at Rebalance Fund Managers.