It was a dramatic week for financial markets
As had been anticipated in last week’s review, markets reacted strongly on various economic indicators and policy decisions last week.
Globally equity markets had rallied strongly as both the European Central Bank’s Mario Draghi and the Fed chairperson Jerome Powell gave strong indications that interest rates will start to move lower in a new cycle of downward rates in months to come.
Bond rates in reaction had tumbled with the US 10-year bond dipping in below 2.0percent. Yields on 10-year German government bonds fell to a fresh all-time low of -0.315percent, as investors digested the prospect of fresh bond purchases by the ECB. French 10-year yields dropped sharply and hit 0percent, their lowest ever.
Domestically, in reaction to these more dovish stance by the world’s two major central banks and in anticipation of a possible cut in the repo rate by the Reserve Bank’s Monetary Policy Committee (MPC) during the next few months, the government long-term bond R186 also had dropped by almost 40 points last week and almost had traded almost below 8.0percent.
The announcement of the steady and sideways movement in the inflation rate to 4.5percent in May, only marginally higher than the 4.4percent recorded in April also supported a stronger rand and lower bond rates.
Share, bond and the exchange markets had remained bullish in anticipation of President Ramaphosa’s second State of the Nation Address (Sona) last Thursday. Although President Ramaphosa was criticised for once again mentioning only plans and not implementation to revive the economy and job creation, markets were satisfied that the government will attempt to rescue Eskom and deal with corruption through a special investigation unit.
The Sona, however, did not convince the markets that the bailing out of Eskom will keep the government’s debt-to- GDP ratio below 60percent. A further downgrading to junk later in the year, therefore, remains a strong possibility.
Read the full story on: IOL.