Many South Africans who took an extended break from work celebrating Easter, Freedom Day and the Bolshevik Revolution (more or less in that order), were no doubt comforted by the largely false notion that somebody else was paying for their time off and foregone output (other than those paid by the hour, who know much better). The rest of the world carried on producing and earning more or less as usual for most of the time (notwithstanding the Bin Laden news).
On returning to work today however, South Africans (those who follow such things) will discover that April was a very good month for offshore investors in SA stocks. Had they invested in the SA component of the emerging market index their return in US dollars in April would have been as much as 5.3%, well ahead of the monthly return for the EM Index, the S&P 500 and the US small caps. In the still mighty rand the returns would have been less impressive with JSE industrials leading the way.
In the US it is proving an exceptionally good quarterly earnings reporting season, still to be concluded. The S&P 500 has ended higher four out of the last five months, has been well supported by better earnings and has not (yet) benefitted from a re-rating.
It was not so much rand strength that accounted for these differences in returns, but the weak dollar. The US Fed at its April Open Market Committee meeting in April and at its very first press conference held thereafter, made it clear that it still regarded unemployment and slow growth, rather than inflation, as its major challenge. With the European Central Bank indicating the reverse sense of priorities, the US dollar weakened in line with an expected widening of the Euro-US dollar yield gap.
The rand accordingly gained against the US dollar in April and, after some mid month weakness, held its own by month end against the basket of other currencies with which SA trades, weighted by their share of exports from and imports into SA. Against a basket of other Emerging Market (EM) currencies the rand made a modest gain in April 2011, even as it weakened marginally againsts the Aussie dollar.
The fundamentals of the rand as a commodity currency that takes its cue from the Aussie dollar, was reaffirmed in April – though with the Aussie dollar trading at close to 109 US cents, a small degree of rand weakness vs the Aussie dollar was perhaps understandable.
Commodity prices were lifted by the weaker US dollar with gold leading the way and the US dollar oil price ending the month a little below its peak levels of earlier in the month. Any weakness in the oil price would be very welcome to central bankers everywhere, especially Mr Bernanke, who is on record as suggesting the spike in commodity and food prices will reverse this year.
The benefits of rand strength that mostly accompanies higher commodity prices will surely be appreciated in Church Street, Pretoria, as helping to contain SA inflation. We can hope that in Church Street, as on Pennsylvania Ave Washington, the fragility of the domestic economic revival, remains of greater concern than an inflation rate, over which the SA Reserve Bank can have no influence, other than not to stand in the way of currency strength.
The rand oil price, after its spike to R840 per barrel early in the month (caused by higher oil prices in US dollars and a temporarily weaker rand is now close to R820), has come off since then, a trend we can hope will lead to lower prices at the pump.
The stable rand, it would appear, has had a modest influence on interest rate expectations. Longer term interest rates that had moved higher in March 2011, moved lower last month, as we show below. The SA money market is still factoring in an increase in short rates within six months. Our view is that this would not be called for and will be resisted by the Reserve Bank, leaving short term rates on hold in 2011.
Perhaps the most notable move in financial markets in April 2011 was the decline in real interest rates in the US. While vanilla bond yields declined modestly, the real yield on the 10 year Inflation protected bonds (TIPS) declined by about 20bps. Inflation protected 10 year yields fell from a minimal 0.96% at the start of month to barely over 0.70% by month end.
Clearly the real cost of capital remains exceptionally low in the US and globally, the lack of demand for capital and abundant supplies of global savings being the primary explanation for this. Nevertheless, investors are seemingly willing to pay up for insurance against higher inflation that remains decisively a long term rather than an immediate threat. The case for the US maintaining its highly accommodative stance seems unanswerable for now. If this means a weaker US dollar so be it; the Fed will not be deflected from its task of assisting economic recovery rather than resisting inflation. Brian Kantor
To view the graphs and tables referred to in the article, see Daily Ideas in todays Daily View:Financial markets in April: From Pennsylvania Ave to Pretoria