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Strong and stable leadership proving elusive

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It remains to be seen quite how strong and stable South Africa’s new government, under it’s fifth president since the fall of apartheid will be; but it is off to a positive start. And, as the saying goes, perception is everything.
 
South Africa’s long and arduous road to recovery has began with a flying start. Optimism started building in November 2017 as the market increasingly sensed the end of Zuma, and culminated with Ramaphosa’s appointment as resident on 15 February this year. Ramaphosa is perceived to be market-friendly, and this has proven to be the biggest confidence boost since South Africa became a fully democratic nation in 1994. The budget announcement last Wednesday managed a fine balancing act and was well received by the ratings agencies, especially Moody’s, the only agency which has South Africa at investment grade. I would expect that Moody’s will not change their rating during March. They will be keeping a keen eye on who Ramaphosa chooses for his cabinet, and this is his next key challenge. He is surrounded by cabinet ministers who have hitherto performed dismally, presiding over their portfolios while malfeasance has prevailed.
 
In particular, the replacement of the following key ministerial positions would provide further support:
  
1. Minister of Finance. The incumbent is seen to be too close to Zuma, and carries allegations of state capture;
2. Minister of Public Enterprises, responsible for the state-owned entities including Eskom and SAA. Lynne Brown has presided over the ruinous demise of Eskom, and a lack of governance and ethics seems to have permeated the various public companies within her portfolio;
3. Minister of Mineral Resources. The disastrous new mining charter needs an urgent rethink, and Ramaphosa has already intervened. This has resulted in a postponement of impending legal action between the mining sector and the state.
4. The Minister of Energy is also seen to be a Zuma appointment. This portfolio is key to unlock the current impasse between Eskom and the delayed Rounds 3.5, 4 and 4.5 renewables projects which represent substantial foreign direct investment.
 
The ZAR has rallied by more than 20% from 14.47 to the USD in mid-November 2017, and it is almost a certainty that the Monetary Policy Committee (MPC) will cut rates at its next meeting on 28 March 2018. Inflation is down to 4.4%, slightly below market expectations of 4.5%, its lowest point since March 2015. The stronger ZAR will continue to provide relief and inflation will improve further.
 
Turning to the UK, Theresa May’s leadership is proving anything but strong or stable. As the UK faces the coldest February in 5 years, the Brexit debate continues to heat up. Business leaders’ sense of frustration has taken on a new level, with the Director General of the British Chamber of Commerce penning a letter to May outlining its key concerns. These concerns are supported by GDP figures released last week, showing growth of 0.4% coming in below expectations of 0.5%. The service sector was the only area to show improvement, once again highlighting the importance of the services sector, particularly the City of London, to the negotiations.
 
With the City in mind, and team Brexit’s as-yet-unsuccessful attempts to negotiate a special deal for London, it is worth noting that London’s position globally is more important than its position within the EU. Don’t get me wrong, the City’s position within the EU post-Brexit will be vital, but to put things in perspective only 25% of the City’s business is EU-related, with a further 25% comprising domestic UK business and a whopping 50% representing international business. This 50% must be considered ahead of Brexit concessions, as New York would stand to benefit significantly if team Brexit forgot to focus on London’s competitiveness internationally and ended up compromising this position, in pursuit of a Brexit arrangement aimed at securing its role within the EU. I would argue further that the growth trajectory of China and India would offer London more opportunities than the lower growth trajectory of the EU.
 
Continuing with the theme of UK vs EU relevance, let us not forget that the UK is one of the EU’s largest trading partners, rivalling both the USA and China, and therefore the negotiations are of significant importance to Brussels too. There is a growing sense of discomfort within the remaining 27 nations regarding the hard-nosed stance being adopted by Brussels, and cracks are starting to show. The UK needs to be adamant, as our relationship with the EU cannot be compared with Canada or any other trading nation. We have a very much entwined relationship, and our importance strategically and historically demands a bespoke arrangement.
 
Within the EU the notion of strong and stable government has proved elusive, for Germany and all eyes are now on the upcoming Italian elections. Italy’s importance is driven by the state of its banking system and possible contagion into the EU system if things go badly at the polls. The EU is enjoying a period of growth, with GDP accelerating by 2.5% in 2017, its fastest rate for ten years. The ECB will be at pains to extend this run and will be mindful of a negative Brexit impact. A recent analysis from Oxford Economics predicts EU business supply chains being hit hard in the event of a ‘no-deal’ Brexit, and put a figure of £100bn as a possible cost. These costs would affect the smaller countries such as Hungary, the Netherlands and Denmark the most, and as a result we are starting to see cracks emerging in the unified approach to Brexit from the EU.  A looming currency war with the USA is a further headache for the EU, and the rhetoric has begun picking up in intensity with their American counterparts.
 
Strong and stable government in the USA remains challenging, with Donald Trump’s approval rating at its lowest point of his presidency. It now stands at just 35%, down five points over the last month. In spite of this, the USA continues to grow robustly, with an unemployment rate already below levels regarded by Federal Reserve officials as stable, building an argument for four rate hikes this year. The market already expects a 25bps hike in March.
 
Global event risks are concentrated in the latter half of the week. From a data perspective, US GDP is likely to confirm robust growth. Eurozone CPI will be interesting, following the ECB minutes which were released last week. The minutes exhibited lower concern about low inflation. Eurozone consumer confidence should continue to build.
 
Coming up this week:
  
US new home sales (Monday) 
Eurozone money supply (Tuesday) 
Eurozone consumer confidence 
US durable goods orders 
US Conference Board consumer confidence 
Richmond Fed manufacturing index 
Fed testimony on monetary policy and the economy 
Eurozone CPI and PPI inflation (Thursday and Friday) 
SA trade balance, budget, PMI and vehicle sales 
US GDP, core PCE, personal income, Markit PMI 
 
 
All views expressed here are the Author’s own and are based on information available at the time of writing

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