The Week Ahead of 10 June 2019


The Week Ahead of 10 June 2019

Published Date: 2019-06-11 | Source: INCE|Community | Author: Chris Gilmour

The Week Ahead of 10 June 2019

Global growth prospects continue to deteriorate, as the ongoing Sino-American trade disputes escalate.

Although apparently not having a large impact on the US yet, tariffs are definitely impacting on Chinese growth.

Those who believe that President Trump is playing some kind of bluff and double bluff along the lines of his book "The Art of the Deal" are sorely mistaken.

The strategy being played out here is part of the new world order, where the US no longer plays the part of global policeman and instead concentrates on what it believes will be good for America. If former allies get hurt in the process, then so be it. Trump, and more importantly his Trade Secretary Robert Lighthizer, are using trade as a weapon to get what they want not just in terms of trade but in terms of allegiance to the US.

The current situation with Mexico is a case in point. Even the slightest hint of trade tariffs being applied against Mexico last week resulted in the Mexican government agreeing very rapidly to help curtail the number of central American refugees using Mexico as a conduit into the US.

The current standoff between America and China will not likely end quickly and more tariffs are likely to be levied upon China. It is important to remember that the US is not a trading nation; it has the lowest trade/GDP ration of any country in the world and can afford to apply tariffs in a relatively cavalier fashion, knowing full well that most other countries will eventually capitulate to America's demands. And if that results in lower global growth generally, the Trump administration is prepared for that. US nonfarm payrolls in May recorded a much lower than expected 75 000, with average wages rising by 0.2% and the unemployment rate remaining at 3.6%. This poor data point reinforces the view that the US Fed's FOMC may well cut interest rates in Jul and Sep. The German Bundesbank slashed its economic growth forecast for German from 1.6% to 0.6% in 2019 and from 1.6% to 1.2% in 2020. The main reason for this pessimistic outlook is the dramatic drop in German exports, against a broader background of cooling global growth.

The S&P 500 closed the week 4.4% higher at 2 873 in Fri 7 Jun, pushed higher by the suspension of trade tariffs against Mexico and the increasing possibility that the US Fed will reduce short term interest rates at its next meeting in Jul. As stated in last week's note, the S&P 500 is moving on sentiment rather than solid fundamentals and it is not a place for the amateur investor.

South African GDP in 2019 Q1 fell by 3.2% compared with 2018 Q4. This is the sharpest decline in a decade and has been ascribed to falls in agricultural production, mining, and manufacturing.

Eskom's stage 4 power cuts in Feb and Mar also exacerbated the situation. Ratings agency Moody's has raised the prospect of SA sliding into a recession this year, following the dismal Q1 GDP numbers. For a technical recession to occur, the Q2 figures would also have to be negative; considering the depth of the Q1 decline, it would take a really precipitous decline in output for an actual decline to occur in Q2.

Additionally, there have been few if any power cuts thus far in Q2, which should help to avoid a recession.

The ZAR experienced a large decline last week, prompted by conflicting views expressed by the ANC's so-called "Top Six", and notably Secretary-General Ace Magashule regarding the independence and mandate of the SA Reserve Bank. Against the general emerging market trend, the ZAR closed markedly weaker against the USD, despite a call by President Ramaphosa for the governing ANC to stop airing its differences in public. At 14.95/USD, it is still a long way off its all-time low of 16.81 against the greenback in the wake of the firing of former finance minister Nhlanhla Nene in Dec 2015, but the trend is not looking good. Up until now, the Ramaphosa administration has successfully managed to avoid the idiosyncratic behaviour that characterized the previous administration-in other words, this government has up till now managed to avoid "scoring own goals". If confidence is to return to the currency markets, President Ramaphosa will need to stamp his authority on the situation and demonstrate unequivocally that he is in charge and that there are not two centres of power within his broader administration. The JSE All Share Index closed 4.4% up at 58 100 on Fri 7 Jun, helped by the weaker ZAR and especially by the impact of the 5.6% improvement in the Naspers share price during the week.

Economic data releases this week;

  • 10 June 2019
    • SA Manufacturing Production April
    • 11 June 2019
      • SA BER Business Confidence Index Q2, SA Retail Sales April
      • 13 June 2019

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