S&P and Fitch downgraded South Africa’s credit rating this week to ‘junk status’, both citing President Zuma’s cabinet reshuffle for their unscheduled decision. The rand is now the world’s worst performing emerging market currency, after being the best performer in the first few months of the year.
- Over the past ten days, the MSCI World Index has fallen marginally in US dollar terms. The Emerging Market Index is slightly higher than it was ten days ago.
- In the US, non-farm payroll statistics for March 2017 disappointed, coming in at 98 000 new jobs, when 180 000 were expected. Unemployment continued to fall, reaching just 4.5%. This could in theory signal that the US is nearing full-employment, but muted wage growth of just 2.7% year-on-year suggests this is not the case.
- This is disappointing considering that job-creation was a core promise in President Trump’s campaign. Weak wage growth could also influence the decision of the Federal Reserve when deciding on rate hikes this year.
- Germany is performing well, with Markit Manufacturing PMI results at 58.3 and Service PMI at 55.6.
- France’s composite Markit PMI is 56.8, but industrial production saw a sharp drop, falling by 1.6% in February when it was expected to increase by 0.5%.
- In the UK, industrial production in February was expected to gain 0.2%, but fell by 0.7%. The UK’s Markit Composite PMI came in at 54.9.
- S&P downgraded South Africa’s international credit rating to below investment grade and retained a negative outlook. However, it maintained the domestic credit rating at investment grade. Fitch downgraded both our international and domestic credit rating to below investment grade or to “junk status”.
- These downgrades mean that GDP growth forecasts are likely to be lowered, interest rates may now rise later this year rather than decline (weaker rand, higher inflation), and business confidence and investment will take a knock.
- The rand is weaker today in 2017, at R13.81 to the US dollar than it was in December 2016 at R13.69.
- The weaker rand has been good for the JSE All Share Index since 65% of its earnings are generated offshore. The ALSI 40 Index has gained 5.7% in 2017, while the ALSI Index is up 5%.
- The Mid and Small Cap Indices have suffered because of the weaker rand. The JSE Mid-Cap Index is down 5% since Mid-March and the JSE Small-Cap Index has declined by 4% since 21 March.
- The JSE Mining Index has done well because of the rand weakness. Since 27 March, it has spiked by 16.5% and is now up 11% since the beginning of 2017.