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Investors shifting to countries offering higher returns and to commodities such as gold

August 2020

Share markets, exchange rates, commodities, international developments, domestic economic indicators

  • By far the biggest announcement that will affect international financial markets going forward was the change in the United States monetary policy, as the economy recovery seems to by V-shaped.

  • According to the US Fed Chair, Jerome Powell, the US will in future follow an inflation target based on an average of 2% - and not target 2% every month.

  • In addition, the US will prioritize employment to inflation, meaning monetary policy will be set to increase employment to achieve at least natural rate of unemployment levels.

  • However, a lot of uncertainty exists as to the exact functioning of the new policy.

  • Nevertheless, at a first glance, this means that interest rates in the US will remain very low for a long period – as inflation will be allowed to overshoot 2% to compensate for periods it undershot 2%.

  • In addition – in the absence of more information – this new monetary policy in the US will not be supportive to the US$ - hence the US$ weakened further in August.

  • When considered in conjunction with very low interest rates and inflation environments in Europe, it means that interest rates will for a very long time be low in two of the world’s largest regions.

  • This increases the probability of investors shifting to countries offering higher returns and to commodities such as gold, while also supporting share markets, as it will underpin demand.

  • In the meantime, the GDPNow forecast suggests annualized economic growth of almost 30% in the US in Q3, pointing to a V-shaped recovery following a 31.7% contraction in Q2.

  • China’s economy also showed a V-shaped recovery as the economy grew by almost 55% (annualized) in Q2 following a contraction of 34.7% in Q1.

  • The UK, however, suffered an economic contraction (annualized) of 59.4% in Q2.

  • South Africa is bound to also see an (annualized) economic contraction above 40% in Q2. Initial quarterly results for the primary and secondary sectors and some tertiary sectors (see table below) show contractions ranging between 20% and 80%. But the large trade surplus will support growth.

  • Although CPI picked up to 3.2%, chances remain for another reduction in the repo rate.

  • However, in contrast to the US, who is now prioritizing employment to inflation, the South African Reserve Bank’s (SARB) conservative “inflation character” will rather see unemployment increasing to 50% than inflation breaching the 4.5% target. Although another rate reduction is necessary, the conservative view makes the possibility remote.

  • The Covid-19 infections, which caused the lock-downs and large economic contractions, are still spreading. At a first glance it may seem to be a second wave, but deeper investigation revealed that, at this point, it is due to strong growth in South America rather than a second wave – confirming the view that the virus will spread at different paces in different regions.

Courtesy: Multivest Economic Division

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