Cees Bruggemans: SARB’s headache – China, US direct proceedings

The old adage that when the United States sneezed the rest of world caught a cold has not been thrown out of the bath but it now has a partner in crime. Global markets are now also moved by the actions of China in the East. Over the past week markets have seen interest rate cuts and currency devaluations from the second largest economy while talk in the West is now shifting towards the Federal Reserve and what it will decide as the next step for interest rates. And all this happening while South Africa, the world’s 33rd largest economy, sits around waiting for the impact of these decisions – another bout of flu or a vaccine injection. Throw in yesterday’s economic contraction and the South African Reserve Bank has a headache to deal with. As Cees Bruggemans puts it: “A daunting challenge, even for SARB, as they prepare to receive incoming spin”. – Stuart Lowman

by Cees Bruggemans*

Cees-Bruggemans-Slider-02It must have been the shortest End of Summer Sale in history. All was supposed to go, and went, in style, out of the window on Monday. Such panic, globally, one rarely sees, with equities, commodities and currencies being given away, and people desperate to get into bonds (safe bonds, that is, like US Treasuries).

And then nearly everything got reversed on Tuesday when the Chinese central bank after hours waded in, cutting interest rates and bank reserve requirements, sending a very loud signal that it wouldn’t stand for all this nonsense.

And large parts of the world happily obliged, just as eagerly buying back what they had so desperately tried to unload 24 hours earlier.

The Rand went from 12.90:$ Friday to top 14:$ on Monday, only to get back below 13:$ yesterday, even if only fleetingly, this morning at 13.10:$. Same with Euro and Sterling.

This was in the European time zone. When the action swung to North America yesterday, New York initially started strongly higher, too, but by the close was back into the red, too many unanswered questions apparently remaining about Chinese and global growth and what it means for American companies and the US economy?

Asia on Wednesday morning gyrated, opening positive but in places resuming equity declines, proceeding mixed as the morning evolved. Clearly, not all stale Chinese sellers may have been flushed out yet or have been converted by PboC policy action, with watching Asia at best warily uncertain. Even so, there remains conviction the PboC will do what is necessary for the weakening Chinese economy.

It leaves global investors at sixes and sevens, blowing hot and cold, trying to look through the fog, getting a better grip on Chinese economic and financial realities, and its many implications, and the manner this will be addressed in coming weeks and months by its policymakers.

Unless, of course, China can’t really deliver at all, its economy slowing shows through yet more strongly, its financial turbulence gets worse, and new selling panics grip the global audience.

Meanwhile, let’s go back to Fed watching. Will they be ready in September to focus on things American, and seeing there steady strength in depth, sufficiently for the Fed to start its lift off, if very very slowly, as we all know by now?

Except that not everybody thinks like this. There are those who believe the Fed will hold off (until March). Really adventuresome souls suggest the world could do with a new bout of Fed bond buying.

So there is something for everyone out there, with risk very widely dispersed around radically different views.

Also, yesterday’s disappointing 1.3% SA GDP shrinkage in 2Q15 was by many taken as a reason for SARB now no longer to cut interest rates. Hello, this data pertained to 2Q15, meaning April through June. When SARB made all these strong sounding statements in July, raising rates by 0.25%, it knew with the rest of us that the economy didn’t look pretty.

With the Rand being back nearly to where it was last week, with SA inflation prospects not all that similar to what they were then (with Brent trading at $43 and sizeable petrol and diesel price cuts remaining feasible in September), and with the Fed still looming over all of us, why should the SARB’s tune change materially?

Or has the SA economy’s weakness only now communicated itself sufficiently for there to be a general sense SARB will hold back?

Key questions remain about China (whether it will cause more havoc), and whether the Fed will be coming through shortly (or back down). Can order be restored on global markets shortly, or will unease continue to prevail, with what kind of fallout for the likes of ourselves?

A daunting challenge, even for SARB. Prepare to receive incoming ‘Spin’. Cricket bats to the ready.

*Cees Bruggemans is consulting economist at Bruggemans & Associates

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