Global Financial Markets – Page 3

A helping hand from Europe

How European Central Bank (ECB) Quantitative Easing (QE) moved the markets, including the rand and the RSA Yields. Is this good news for emerging market economies?

The unexpected scale of the intended QE in Europe announced on Thursday moved the markets. Most conspicuously it weakened the euro vs the US dollar. Such weakness must be good for European exporters and thus for growth prospects in Europe regardless of how much more lending European banks will do with their pumped up cash reserves. Some stimulus from a weaker euro will add something to the demand for bank credit, which has been as weak as the supply of bank credit from European banks – hence the case for QE.

US dollar strength and euro weakness was an entirely predictable response to what became a wider interest rate spread in favour of US Treasuries over Bunds.

The rand not only gained against the euro but also strengthened against the US dollar on the QE facts.

This strength was however not confined to the rand. It was also extended to many of the other emerging market currencies. The rand lost a little bit of ground against the Brazilian real and gained against the Turkish lira. It also held its own against the Mexican peso and Indian rupee as we also show below. Thus euro weakness vs the US dollar extended to emerging market currencies, including the rand.

The strength of the rand vs the euro was linked with further strength in the RSA bond market. We have alluded in previous notes to the recently strong relationship between the rand/euro and RSA long bond yields. This trend of declining RSA yields associated with rand/euro strength held up strongly over the past few days. It indicates that the lower euro interest rates and a wider spread in favour of RSA (and presumably other emerging market) bond yields also attracted flows of funds out of or away from Europe – enough to move emerging market bond yields lower.

It was not only emerging market bond markets that seemed to benefit from changes in flows of funds in response to ECB QE. Emerging market equity markets, including the JSE when measured in US dollars, also outperformed the S&P 500.

Lower interest rates and determined reflation in Europe have improved global growth prospects. It does appear that EM bond and currency markets have benefitted and that EM economies may grow faster in response to the sustained improvement in the US economy and now hopefully better growth prospects in Europe on which EM economies depend. So much can be read into market moves. As we have mentioned before it is hard to predict other than dollar strength Vs the Euro in the light of the sustained spread in the yields offered by US Treasuries over German Bunds. It seems that the wide spread between Euro yields and EM yields can help to protect EM currencies including the ZAR from dollar strength. This means less inflation as well as low long term rates. It can also mean lower short term rates that might help stimulate growth even as inflation comes down.

Point of View: In praise of the global consumer plays

How the global consumer plays on the JSE have kept up well with the S&P 500.

A noticeable feature of global financial markets has been the strong recent performance of the S&P 500 Index, both in absolute and even more impressively in relative terms. As we show in the charts below, the S&P 500, the large company benchmark for the US equity market, continues to outperform both emerging markets (EM) and also the US smaller listed companies represented in the Russell 2500 Index.

The S&P 500 has gained approximately 15% against the MSCI EM benchmark since a year ago and is about 5% stronger vs the Russell.

We also show that, compared to a year ago, the SA component of the benchmark EM Index (MSCI SA) that excludes all the companies with a primary stock exchange listing elsewhere (SABMiller, British American Tobacco, Anglo American, BHP Billiton and the like) has done well compared to the average EM market, of which only about 8% will be made up of JSE listed companies. The JSE All Share Index, converted to US dollars, has lagged the S&P 500 by about 10% over the past 12 months.

Continue reading Point of View: In praise of the global consumer plays

An extraordinary day in the markets

For a while now – since 19 September to be precise – the markets have stopped worrying about what US growth might do to interest rates (threatening equity valuations) and began to worry about growth itself.

News of deflation in Europe had fed these fears and helped force bond yields everywhere (including RSA yields) lower. Yesterday morning a weak US retail number, announced before the market opened in New York, was more than enough to encourage a dramatic sell off of leading equities and an equally dramatic rush to the apparent safety of bonds. We show the intraday moves in the bond markets below.

Continue reading An extraordinary day in the markets

Equity markets and interest rates: September suffering

September was a tough month for equities, even though interest rates had declined by month end.

September proved to be a difficult month for equities and it was especially difficult for emerging market (EM) equities, including the JSE that once more behaved like the average EM equity market. The S&P 500 lost less than 2% of its US dollar value in the month while the EM bench mark lost almost 8% of its value and the JSE All Share Index, measured in US dollars, had fallen by more than 8% by the end of the month. Continue reading Equity markets and interest rates: September suffering