When good news becomes bad news
It was all looking good at the start of the second quarter – stock markets were reaching historical highs and sentiment was buoyant – and then the US Federal Reserve ruined the party by drip-feeding the market with comments about the possibility of it beginning to withdraw liquidity support. It took a while for reality to dawn on investors but then, in May, Ben Bernanke finally spooked the market by indicating the Fed could start “tapering off” its $85bn a month stimulus programme as early as September. This had the following results:
- Stock markets in the developed world tumbled of their highs
- Sentiment towards emerging markets soured
- Volatility jumped
- The rand’s depreciation accelerated
After that point, any news that showed the US economy was on the road to recovery was taken as bad news for the market, particularly when it came to the three key statistics used to gauge the US recovery: jobs growth, the housing market and private sector credit extension. So, during June and July whenever a better-than-expected figure was released to the market, the market tended to react negatively.
World economic review
- The US Federal Reserve ruffled markets when it indicated it was scaling back on quantitative easing if US real economic data continued to improve.
- At the first sign that it could be as soon as September, developed market equities came off their record highs in May but has since rebounded.
- The US housing market continued to improve but some recent measures indicated that the pace of recovery may be slowing.
- The US unemployment rate declined and growth in the private sector credit extension has slowly started picking up.
- US real consumer spending grew at an annual rate of 2% during the first quarter of the year.
- The US Institute for Supply Management’s (ISM) manufacturing index jumped from 50.9 to 55.4 in July, ahead of expectations and its highest reading for two years.
- Growth in the US was also a healthy 1.7% during the second quarter this year and well ahead of expectations.
- In the Euro-zone, Purchasing Managers Index (PMI) figures showed manufacturing activity expanded slightly for the first time in two years.
- Both the European Central Bank and the Bank of England left interest rates unchanged and reiterated they would remain low for an extended period.
- China’s GDP growth slowed slightly to 7.4% in the second quarter as weak foreign demand weighed on output and investment.
- In SA, the rand weakened sharply during the second quarter, amid falling precious metal prices and the Fed’s announcement that it may begin scaling back quantitative easing.
- Inflation surprised on the low side, with headline CPI slowing to 5.6% in May from 5.9% in April.
- GDP in current prices advanced by 7.8% during the year to the first quarter of 2013 – well short of the 10% pace assumed by the National Treasury in its National Budget revenue projections for fiscal year 2013/14.
In developed markets, investors now realize that the US Federal Reserve and China cannot keep the world’s economy afloat forever. The US will need to ratchet down quantitative easing measures and China is attempting to make the transition to a consumer rather than investment driven economy. At the same time, it dawned on investors – who disinvested en masse in disappointment during May and June – that emerging markets could no longer be treated as a basket of countries, but had to be looked at on a country by country basis.
In SA, there’s been a growing realisation that we are facing some tough economic and political challenges and, as a
commodity-producing economy, we have also been hard hit by the global commodity price meltdown and potentially explosive local labour issues. As behavioural economists would have predicted, the response to these unfolding realities was to panic – at first. But slowly investors are coming to grips with this new state of play and taking comfort from route markers like the outcome of the recent G-20 meeting, which saw leaders put their support behind continuing to prioritise growth over austerity.
So by the mid-year mark investors were getting onto a more even keel and, for SA, the rand’s slide had run out of steam, with the local currency pulling back to R9.70 to the dollar by late July – possibly on its way back to fair value.