The U.S. Federal Reserve held interest rates steady on Wednesday but strongly suggested they would cut them in the months ahead if the economic outlook, clouded by uncertainty over trade policy, didn’t improve. The committee removed a previous statement about being patient in setting rates; and added that it will act appropriately to sustain the economic expansion. Other major central banks are also shifting towards easier monetary policy, which has resulted in lower bond yields globally and increased risk appetite.
On the trade war front, President Donald Trump tweeted that he has had a “very good telephone conversation” with his Chinese counterpart, Xi Jinping. He has also confirmed that the two leaders will have an “extended meeting” on the sidelines of the G20 Summit in Osaka (28-29 June). President Trump had previously threatened to “immediately” raise tariffs on a further $300bn of Chinese imports if Mr Xi did not hold a bilateral meeting with him at next week’s Summit.
Meanwhile, the European Union joined China and five other World Trade Organization members in criticizing the Trump administration’s $16bn assistance program for U.S. farmers, indicating that the bailout may violate international rules.
The Bank of England held their key interest rate steady at 0.75% as expected but cut its Q2 2019 growth forecast.
The Bank of Japan also held its monetary policy steady, but stressed that global risks were increasing, as trade tensions and uncertainty over U.S. economic policies jolted financial markets.
In Europe, ECB President, Mario Draghi, suggested that the central bank will provide more stimulus, either through new rate cuts or asset purchases, if inflation does not pick up. Draghi also defended the tools that the organisation has available, stating that its asset purchase program still has considerable headroom.
For the week, global equities were stronger. In the U.S., the Dow Jones (+2.41%), S&P 500 (+2.20%) and Nasdaq (+3.01%) indices were all positive. European and Asian markets were also stronger with the Euro Stoxx 50 (+2.60%), FTSE 100 (+0.84%), Nikkei 225 (+0.67%) and Shanghai Composite (+4.16%) indices all ending the week in positive territory.
Market Moves of the Week
Locally, the market focused on President Ramaphosa’s State of the Nation Address (SONA). Key takeaways included:
- The bailout of Eskom. President Ramaphosa said that Eskom is “too big to fail”; and that the government will soon give the power utility “a significant portion” of the R230bn it requires over the next decade to remain solvent (credit rating negative);
- The Reserve Bank mandate was reaffirmed (positive);
- Not much additional information on land reform. We are going to have to wait for the findings of the Land Reform Report; and
- The long-awaited auction of new broadband spectrum could take place within the next month. Vodacom Group Ltd. and MTN Group Ltd., have long been demanding the opportunity to bid for new spectrum to extend high-speed internet.
Ratings agency Moody’s, reaffirmed South Africa’s credit-rating outlook as stable, giving the country’s new government more time to tackle key challenges such as low economic growth and embattled state-owned companies to ward off junk status. Annual CPI increased to 4.5% in May, marginally ahead of the market’s expectations.
Finally, gold broke through $1,400 an ounce for the first time since September 2013 after the U.S. Federal Reserve hinted at reducing interest rates as early as next month, weakening the dollar and adding to gold’s appeal.
The JSE All Share Index (+1.28%) ended the week stronger, with resources (+0.44%), financials (+3.79%), industrials (+0.86%) and listed property (+2.01%) all in positive territory.
Chart of the Week
Gold has remained capped at around $1,350 an ounce for six years now before breaking $1,400 this week. Fed Chairman, Jerome Powell opened the door to interest rate cuts as early as next month in a media briefing after the central bank’s policy meeting on Wednesday – a major contributor to the strength in the gold price this week. Should the Fed ease significantly – you can expect to see a weakening of the U.S. Dollar. That, in turn, is likely to be good for the gold price.
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