In the markets: What to watch this week

Markets got a boost last week after the Bank of Japan (BOJ) unexpectedly cut its benchmark interest rate below zero in a bold move to revive its economy during this latest cycle of slowing global growth.

The BOJ policy hopes to steer any money released into the system away from speculative activity, such as buying stocks, and accelerate lending to support the real economy.

As expected, the US Federal Reserve kept interest rates unchanged on 27 January. The accompanying statement read that the Fed was “closely monitoring” global economic and financial developments and signalled that it had already accounted for a sell-off.

Fed policy makers said that the economy was on track for “moderate growth, a stronger labour market and gradual rate increases”, suggesting that the chances of hitting a March interest rate hike had diminished, but isn’t off the table.

To calm excitable investors, the Fed removed a prior reference to the economic outlook being “balanced” from the statement and said it was weighing how the global economy and financial markets could affect its outlook.

ADP Non-Farm Employment figures due this Wednesday are closely monitored by the Fed and a good reading could put the bears into hibernation, lifting stocks and the rand.

SARB governor Lesetja Kganyago announced his decision to increase the repo rate by an aggressive 50 basis points, signalling more rate hikes to come. The rand rallied the most in six weeks, but the governor said the weakness of the rand has already had a worse effect than initially expected.

Growth forecasts were reduced sharply from 0.9% to 1.5% and inflation forecasts were increased to 6.8%, outside the target band of 3% to 6%, from 6%. The dilemma facing the monetary policy committee is anaemic growth with flaring inflation. The persistent drought is expected to increase food prices to a peak of 11%.

The structural constraints, as emphasised by the Reserve Bank, leaves Capilis wondering how long the rally of the rand will last.

This week The People’s Bank of China (PBOC) will do its part to keep the banking system flush with cash by opening the flood gates with over approximately 690bn yuan (R1.7tr), as in last week’s effort, to avoid a lack of liquidity during its Lunar New Year celebrations.

China poured water over concerns of an imminent devaluation in the yuan to promote exports and start a currency war. We at Capilis expect the yuan to depreciate slowly, unlike its past two sudden devaluations.

China’s manufacturing data – due early on Monday morning – and Wednesday’s Australian trade data will hopefully show more signs of an improvement in the largest emerging-market economy, and impact positively on the rand and global equities. Australia’s largest trading partner is China, making Australia’s trade data a reliable barometer of China’s economic activity.

Also on the cards is ‘Super Thursday’. The name of this (otherwise normal) day was coined  by investors after the Bank of England decided to release its Inflation Report, MPC Official Bank Rate Votes, Monetary Summary, Official Bank Rate, Asset Purchase Facility, MPC Asset Purchase Facility Votes, followed by the BOE Governor Mark Carney’s speech, all in one day.

This all-in action will have investors parsing for further clues as to where central bankers think the economic and financial markets are headed.

More market moving data this week includes:

Monday:

o   South Africa Barclay’s Manufacturing PMI

o   South Africa Total New Vehicle Sales

o   US ISM Manufacturing PMI

Tuesday:

o   Great Britain Construction PMI

o   EU Unemployment

Wednesday:

o   China Caixin Services PMI

o   Japan Consumer Confidence

o   South Africa Standard Bank PMI

o   Great Britain Services PMI

o   EU Economic Forecasts

o   US ISM Non-Manufacturing PMI

o   US Crude Oil Inventories

Thursday:

o   US Unemployment Claims

Friday:

o   South Africa Foreign Exchange Reserves

o   US Non-Farm Employment Change

o   US Unemployment Rate

o   US Trade Balance

Giacomo Bonavera is head of foreign exchange trading at Capilis Asset Managers. Click here (http://www.capilis.co.za/) to visit the firm’s website.

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