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Cape Town - The catalyst for a short-term rebound in the JSE appears to be in place, says Overberg Asset Management (OAM) in its weekly overview of the SA economic landscape.
The continuation of US zero interest rate policy will enable the SA
Reserve Bank to pause its own interest rate tightening cycle. As a
result SA equities should rebound over the short-term.
However, it should not be long before the slide in global equities and SA equities resumes. The US non-farm payroll numbers are symptomatic of a broadening deterioration in global economic fundamentals.
Despite the sudden exuberance over interest rate policy there are clear warning signals from key leading economic indicators, says OAM.
South Africa economic review
• After slumping in the second quarter (Q2) to a 14-year low of -15 the FNB/BER consumer confidence index recovered to -5 in Q3 beating the -11 consensus forecast. The improvement is attributed to the R1.20 drop in petrol prices since July and the marked reduction in electricity load shedding.
All three sub-indices improved with consumers’ assessment of their financial position rising from -2 to +11, more than reversing the -9 point decline the previous quarter. The rating of the present period as a good time to buy durable goods improved to -9 and the economic outlook index improved to -15.
However both sub-indices remained firmly in negative territory suggesting consumers believe economic prospects will deteriorate further over the next year. FNB chief economist Sizwe Nxedlana cautioned that: “At -5 index points, consumer confidence remains depressed, pointing to a low willingness to spend and utilise credit among households.”
• Having dropped sharply in August from 51.4 to 48.9 the Barclays manufacturing purchasing managers’ index (PMI) increased as expected in September to 49.0 but less than the 49.3 consensus forecast. The PMI is still below the key 50-level which is disappointing given the recent absence of load shedding, suggesting that manufacturing is being impeded by weakening demand as well as supply-side constraints.
The business activity sub-index fell from 48.6 to 46.6 and the expectations index fell from 52.5 to 49.3, its lowest level since 2009. However, there were some bright spots: The new sales orders index increased for a second straight month from 50.6 to 51.9 and the employment index increased sharply from 45.2 to 49.5 suggesting some stabilization in activity and employment conditions in coming months.
• The trade balance unexpectedly deteriorated from a deficit of –R1.1bn in July to –R9.9bn in August, the widest deficit since the start of the year. This is in contrast to the consensus forecast surplus of R0.4bn.
Imports fell by -5.5% month-on-month while exports increased by 3.6%. Exports came under pressure due to softer commodity prices and weakening demand for commodities pushing exports of base metals and mineral products down by -20.0% and -20.1% month-on-month.
Meanwhile imports of transport equipment increased 22.1% on the month although this may largely comprise components for increased domestic vehicle production. The overall data suggests the current account surplus will widen in the third quarter (Q3) to around -4.0 to -4.5% of GDP, up from the -3.1% deficit in Q2.
• Following its increase in year-on-year growth from 8.1% in June to 8.4% in July private sector credit extension (PSCE) growth improved again in August to 8.6%.
Most of the growth is attributed to corporate credit extension which increased 13.1%, only down slightly from 13.3% with companies using credit to invest in faster growing economies across Africa. Household credit extension also improved with growth rising 4.2%, the strongest pace since July 2014.
Growth in mortgage advances, making up the bulk of household credit, improved from 2.8% to 3.5%, the strongest pace since early 2011.
However, there were areas of concern: Second quarter (Q2) National Credit Regulator data shows a tightening in lending standards with the rejection rate on new credit applications rising from 52.6% in Q1 to 56.0% in Q2. In addition, the proportion of the unsecured credit book reported as overdue increased from 28.9% in Q1 to 35% in Q2.
• According to the quarterly employment report total non-farm employment declined in the second quarter (Q2) by -1.8% year-on-year although on a quarter-on-quarter basis only decreased by 1 000 a percentage decline of less than -0.1%.
The manufacturing sector lost 7 000 jobs while surprisingly the mining sector was unchanged in spite of weaker commodity prices. However, capacity shutdowns in the mining sector should reflect in job losses in the second half of the year.
Average hourly earnings per worker grew 6.6% year-on-year, down from 8% in Q1, while beneficial in terms of reducing inflationary expectations will be a constraint on consumer expenditure.
• Foreign investors bought a net R2.1bn worth of domestic bonds but sold a relatively large –R4.2bnn of equities in the past week, following on from the –R2.4bn worth of net equity sales the previous week.
Foreigners’ contribution to total market traded volume was also high at 42.9% well above the year-to-date average of 38.2%, with increased selling by foreigners lifting the chances of a market correction. Foreign equity selling was most apparent in the property sector.
For the year-to-date foreign net buying of bonds and equities amounts to R10.70bn and R32.02bn respectively.
South Africa political overview
Unite Against Corruption (UAC) marches took place simultaneously in Pretoria and Cape Town but failed to attract the hundreds of thousands which had been hoped for.
The weak turnout is attributed to the absence of National Union of Metalworkers of SA (Numsa) which was barred due to insufficient notice being given. However, Numsa will lead other sympathetic unions in a further nationwide march against corruption on 14 October.
READ: Time to stop talk and act on corruption
While attended by the EFF the UAC does not have any political affiliation. Both Minister in the Presidency Jeff Radebe and ANC spokesperson Zizi Kodwa also attended the march.
According to the organisers the UAC marches mark “the beginning of a mass movement in which people from wide-ranging sectors of society showed their willingness to put aside their differences and to raise their voices against corruption, to protect our hard-won democracy, our freedom and our rights.”
The week ahead
• Mining production: Due Thursday, 8 October. Due to the favourable base effect of weak comparative data year-on-year growth in mining production is expected to improve from 5.6% in July to 6.5% in August, according to consensus forecast.
However, on a month-on-month basis mining growth is expected to slow from 1.10% to 0.80% due to falling commodity prices and weakening global demand.
• Manufacturing production: Due Thursday, 8 October. Year year-on-year growth in manufacturing production is expected to slow from 5.60% in July to 1.40% in August, according to consensus forecast due to the negative effect of a high comparative base last year.
On a month-on-month basis manufacturing production growth is expected to improve only slightly from 0.3% to 0.5%. Production remains under pressure from a challenging domestic environment amid rising operating costs, infrastructure bottlenecks and continued uncertainty over electricity supply.
Weakening global trade is also impacting external export demand.
Technical analysis
• The rand remains below successive support levels suggesting a continuation in the rand’s depreciation. Although the rate of the rand’s depreciation is accelerating there is no sign yet of panic selling or capitulation. This stage needs to be reached before a reversal in the rand’s move can occur.
• The US dollar index is testing a major 30-year resistance line, which if broken will pave the way for further strong gains in the currency.
• Despite the recent uptick in bond yields the long-term JPMorgan global bond index bull trend remains intact, with the yield targeting a new low during the fifth and final wave.
• The US 10-year Treasury yield has broken above key resistance levels of 2.0% and 2.2%. However, there is unlikely to be a major bear trend in US bonds as the deleveraging phase is still in its early stages.
• The benchmark R186 SA Gilt yield is testing support at 8.70% which if broken could open a new target of 9.5%.
• The MSCI World Equity index has broken downward from a rising wedge formation which has been intact since the 2008/09 global financial crisis. It is unlikely that the downward move is over as the correction so far is too small for a bull market of the magnitude and duration of the 2009-2015 bull market. The downside target for the MSCI World Equity index is 1,400.
• Since the 1950s the Dow Jones and S&P 500 have displayed 7-year up-cycles and the top of the current US equity cycle can be expected in the next year. The next major wave down will complete the 16-17 year secular bear market that started in 2000. The secular bottom should occur around June 2016.
• The S&P 500 has broken down from a rising wedge pattern, which is traditionally a trend-changing pattern. The break below the 2070 level confirms a reversal of the upward trend. A further negative signal is that the Dow Jones Transport Index, traditionally a lead indicator for the broader market, is leading the broader market lower on the downside.
• Brent crude’s break below the key $50 support level suggests a continuation of the weakening long-term trend. Copper is regarded a reliable lead indicator for industrial commodity prices and barometer of global economic growth. It has broken below the key $5,300 support level suggesting further downside ahead.
• Despite recent advances Gold is in a protracted bear market signalled by rapid declines through successive support levels at $1 300, $1 250 and $1 100. Gold’s next target is $1 000 which is likely to be breached before the bear market ends.
• The All Share index has broken below its bull market support level which has been intact since 2009. The downside target for the All Share index is 41 000.
Bottom line
• The saying goes that when the US sneezes the rest of the world catches a cold. This stands to reason with the US dominating global trade and global financial markets. US equities comprise over 50% of the global Morgan Stanley Composite Index (MSCI).
The JSE will get sucked into the slipstream of US equity markets. Economic data in the US has a strong bearing not just for US markets but also for markets in the rest of the world, including the JSE.
• Weak US non-farm payroll numbers released last Friday have pushed back the expected timing of the Federal Reserve’s first interest rate increase by around six months.
According to Fed funds futures the first US interest rate hike will only occur in the second quarter of next year. The prospect of continued zero interest rates in the US has provided short-term relief to US markets and equity markets around the world.
The S&P 500 index is up around 3.5% from its lows two days ago when the payroll numbers were released. The JSE has rebounded by a similar amount.
• Regional US manufacturing purchasing managers’ indices, which measure actual business conditions at company level, have declined into contractionary territory to the lowest levels since the global financial crisis in 2008 to 2009.
• The yield on higher risk US corporate bonds have spiked even higher in the past fortnight sending out a red flag to equity markets. Bond and credit market trends are a very reliable lead indicator for equities as they tend to be more liquid and more efficient, with participants from all industries not just the financial services industry.
A spike in US high yield corporate bonds preceded the sharp decline in US equities at the end of August. Worryingly the yield has risen by an additional 100 basis points subsequent to the correction and ensuing stabilisation in US equities, signalling a high probability that US markets and the JSE will re-test their recent lows.
For the full report, including a look at international markets, click here.
* Overberg Asset Management (OAM) is an Authorised Financial Services Provider No. 783. Overberg specialises in the private management of local and global discretionary portfolios as well as pension products.
Disclaimer: Information and opinions presented in this report were obtained or derived from public sources that Overberg Asset Management believes are reliable but makes no representations as to their accuracy or completeness. Any opinions, forecasts or estimates herein constitute a judgement as at the date of this Report and should not be relied upon. There can be no assurance that future results or events will be consistent with any such opinions, forecasts or estimates. Furthermore, Overberg Asset Management accepts no responsibility or liability for any loss arising from the use of or reliance placed upon the material presented in this report.
