Market commentary

Central banks stole the limelight again this week, as markets geared up for three individual interest rate decisions within the space of two days. Aggressive monetary stimulus has resulted in an abundance of liquidity in financial markets, but the key question is now whether this has been enough to kickstart the post-pandemic economy.
  
CENTRAL BANKS IN THE SPOTLIGHT
 
Risk assets sustained their gains into the new week, while the dollar continued to feel the pinch as markets braced for interest rate decisions from the US Federal Reserve and the Bank of England. 
 
The market had largely anticipated that the Fed would keep rates on hold at 0.25%. Instead, the highlight of Powell’s address was his note that the Fed will keep interest rates near zero until 2023, eliminating the chances of a hike over the next three years. The central bank aims to stimulate growth and revive the labour market by tolerating inflation in excess of 2%. The Fed reaffirmed that a patient approach is appropriate in the sluggish growth environment, and that this will continue well into the recovery period to ensure that the economy has enough steam to keep pushing forward. 
 
The Fed also provided some guidance in terms of asset purchases, indicating that it will maintain the current level of purchases for the time being in order to bolster efficient market function and financial conditions. While the US economy is showing signs of a recovery, certain areas are still depressed, and the economy as a whole remains well below pre-pandemic levels. 
 
Meanwhile, the Bank of England (BoE) indicated that it will be working with regulators to consider negative interest rates – a first for the UK. However, COVID-19 fallout coupled with the impact of Brexit seems to have backed the economy into a corner. Some of the data from the UK has improved more than initially expected, but unemployment is expected to stay elevated while economic output remains subdued. So, with interactions between the BoE and bank regulators likely to commence soon, the market is gearing up for a 10bps cut in February in an attempt to assist the UK’s ailing economy. 
 
The BoE kept bond purchases steady at £745bn and interest flat at 0.1%. However, economists predict that bond purchases might increase by £50bn as early as November. 
 
Other data for the week included:
 
US: 
 
•    US manufacturing and industrial production undershot expectations, gaining 1% and 0.4% respectively month-on-month in August
•    US retail sales remained sluggish at 0.6% month-on-month during August
•    US jobless claims overshot the mark slightly, coming in at 860k for the week
 
EU:
 
•    Industrial production gained 4.1% month-on-month in July
•    CPI contracted by 0.2% year-on-year in August
 
UK:
 
•    Unemployment elevated in July, rising from 3.9% in the previous three-month period to 4.1%
•    CPI gained 0.2% year-on-year in August
 
CN:
 
•    Retail sales gained 0.5% year-on-year in August 
•    Industrial production added 5.6% year-on-year in August
•    Unemployment remained steady at 5.6% in August, 0.1% lower than July
 
SA CELEBRATES MOVE TO LEVEL ONE
 
South Africans breathed yet another sigh of relief on Wednesday as President Ramaphosa announced the move to lockdown level one. While level one is the closest to normal we have experienced since entering lockdown in March, certain restrictions still remain intact – including limitations on buying alcohol and the curfew between midnight and 4am. 
 
With December holidays fast approaching, the tourism industry will get a welcome boost from the lifting of travel bans, even as many restrictions such as strict visa control measures will be imposed. The lifting of the travel ban will also finally offer South Africans the opportunity to reunite with family in other countries. 
 
From an economic perspective, the key event topping the local calendar this week was the South African Reserve Bank’s interest rate decision. Market participants were divided between a cut and keeping rates steady, especially after the dire economic growth numbers published earlier this month. However, the SARB kept interest rates steady at 3.5% on Thursday. The South African economy faces many challenges ahead, and with inflation back within the target-band after dropping to historic lows, the SARB is deploying a cautious approach. 
 
The local currency, although trading within a broad range, has remained rather temperamental, demonstrating some wild whiplash-inducing swings. This week saw the local currency test a low of R16.25/$, and a sustained break below this level could open the door towards the R16.00 mark in the short term. However, this strength is not sustainable given the local fiscal and economic backdrop.  
 
LOOKING AHEAD
 
As we head towards October, we will start paying attention to the upcoming Medium Term Budget Policy Statement for guidance in terms of government’s efforts to cut spending and steer away from the fast-approaching debt crisis looming on the horizon. 
 
In the week ahead, however, we would suggest making use of the current risk rally to fill up on foreign currency requirements, with the rand now trading back at levels last seen in March. 
 
From a data and events perspective, we will keep an eye on: 
 
Monday: 
 
•    PBoC loan prime rate decision
 
Wednesday:
 
•    EU Markit composite PMI
•    UK composite PMI
•    US manufacturing and services PMI
 
Thursday:
 
•    RSA Heritage Day
•    US jobless claims
 
Friday
•    US durable goods orders
 
The rand started the day trading at R16.17/$, R19.17/€ and R20.96/£.
 
Kindly note that the weekly wrap will continue on Friday 02 October 2020.
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