Weekly market report by Andre Botha,
Senior Currency Dealer at TreasuryONE
The world economy in focus!
Over the past couple of years, we have seen the phrase Global Growth Concern enter the market, first spooking the market, and then seeping into the background before raising its head again. The phrase came about after the Central Banks, which participated in QE, needed growth to be robust for them to start tapering the QE programs and normalising their monetary policy without plunging their economies and the world economy into another recession.
Looking over the spectrum of the world economy at the moment there are a couple of red flags that are appearing, and this is pushing the question of global growth to the centre again. We’ve seen the US Fed turning decidedly dovish at the start of the year when they announced that they would monitor the economy and decisions on their interest rate will be very much data dependent. The decision has put a real question mark on how robust the US Fed sees the US economy despite its economy showing good growth in 2018. Some factors probably aided their dovishness, and chief among these would be Brexit, the slowdown in Europe and the trade dispute with China. The prudent thing to do in a situation with so much uncertainty in the market is to adopt a wait and see approach as the Fed has done.
The Eurozone has been floundering, to say the least, as they have revised their 2019 growth down from 1.7% to 1.1%. They’ve also introduced QE light with the third injection of stimulus to happen in Septemeber 2019. After looking to normalise QE in the European summer of 2019, that decision has been kicked quite a long way down the road. With the EU struggling, it is feasible that the EU could face fresh growth headwinds in the next year and be one of the anchors that drag global growth down.
In terms of Brexit, we will receive some much-needed answers today when Theresa May presents her new Brexit plan to the British Parliament. Should the plan be accepted, it opens the door for the Brexit wheel to start turning and processes to fall into place for Britain to leave the EU. However, should the plan fail this afternoon we could be in for a wild ride in the British Pound and the odds of a second vote on Brexit increases markedly. The longer the Brexit saga drags on, the more it will weigh on global growth and the more safe-haven currencies will be in favour at the expense of EM currencies like the Rand.
Speaking of EM currencies, we have seen China in the news with them revising their economic growth downward to 6% for 2019, as the US-China trade dispute and the lack of demand for Chinese products have started to weigh on their economy. For EM markets this is a worrying sign as a slowdown in China will filter through EM markets and the contagion effect will not place EM markets in the best light. We have already seen South Africa’s growth to be anaemic at best and another growth shock will put us in a tight spot, especially with local elections coming up, running a very tight budget and Credit rating agencies looking directly at the growth rate of South Africa.
This year will be a testing year in terms of global growth, but the pressure could be alleviated a little with a favourable US-China trade resolution and the Brexit debate going through without much of a hitch. Judging by past events, this is a lot to ask for, and as long as global growth is on the front pages, a “risk-off” scenario is the most likely event.
TreasuryONE offers a daily market view and daily market rates in the morning and afternoon via WhatsApp. If you want to receive up to date market information, please add the following number to your contact list – TreasuryONE market rates no 061 109 3649 and complete the following form for us to add you to the service.