Global Markets: Simmering risks

US data painted a mixed picture for Fed interpretations. The ISM fell from 53.5 to 52.7, which disappointed estimates and is seen as further evidence that the strong dollar is having a detrimental impact on industry. However, the core PCE price index remained steady at 1.3% y/y despite the disinflationary force. With the Fed having lowered the bar for the lift-off by way of less optimistic growth and inflation forecasts, a rate hike is still on the cards this year. The market is still discounting a greater than 50% probability of an increase by the end of the year, but is less convinced about a September hike.

The deputy governor of the BoJ dismissed the risk posed by a Fed rate hike. Yet the weakness in EM currencies and in equity markets suggest otherwise. There may be brewing concern over the impact of higher US rates on growth at a time when earnings momentum is slowing sharply. The VIX is low but seems to be turning a corner and the EMBI spread has increased.

The oil price again made headlines yesterday as the weak PMI data from China permeated markets, fuelling the deflationary fears of a lack of demand. Brent crude fell below US$50/bbl, the first time since January, and opens the day at US$49.68/bbl. This is proving to be a welcome offset to weaker EM exchange rates, particularly for oil importers such as South Africa.

In China the weakness in the economy is being acknowledged - the Commerce Ministry reportedly alluded to continued low import growth. Yet policymakers are still trying to stem market forces - according to media reports, short selling on the equities bourse was restricted yesterday.

Restrictions were not going to help the Greek equity market. It reopened yesterday after being closed for five weeks, with stocks plummeting by 23% before rebounding by 8% - on a net basis the market was down by 16% by the close of trade. MSCI has indicated that it will monitor restrictions on trade and may need to reclassify the Greece index. Negotiations are ongoing and Greek officials have indicated that they would be in a position to submit detailed pension reforms by October. The next payment to creditors is due on 20 August. The renewed concerns over the sustainability of sovereign debt has prompted S&P to revise the outlook on the European Union's debt from stable to negative, with the rating currently at AA+.

Puerto Rico's Public Finance Corporation defaulted on a debt repayment, which came as no surprise. The US territory is trying to restructure its US$72bn worth of debt. To put this into perspective: Puerto Rico's debt per capita is around US$20,500 versus South Africa's US$2,500.

Australia kept its policy rate unchanged at 2.0% this morning, in line with expectations. This gave modest support to the Australian dollar but the big picture of falling commodity prices is evident in the unit losing 21% against the US dollar over the past year.