African markets received a welcomed boost in the middle of the week after a cautious Fed policy statement saw investors deferring their expectations regarding the timing of the next hike in US interest rates. The prospect of low borrowing costs in the US boosted the appeal of higher-yielding assets in developing nations however, the sky was somewhat clouded by uncertainty over the UK’s Brexit which has significant echo potential depending on the market.
African markets were mostly down this week although for various type of reasons. ZSE Ind. is the worst performer of the week and decreased by 7.47%. The cash shortage has intensified in recent weeks in Zimbabwe so much that a parallel black market has developed. In 2009, Zimbabwe abolished its own currency and replaced it with a multi-currency system after its economy collapsed. In addition to the dollar, the Zimbabwe allows the use of the South African rand, the yuan, the pound and the euro. The dollar currently accounts for about 95 percent of trade. Although that system restrained inflation for a while it also left the government short of cash. There is a situation where people pay a premium for hard cash today. The country’s central bank announced last month it would launch legal tender called “bond notes” pegged to the US dollar. Critics say this plan will worsen the black market as because Zimbabwe is a net importer and bond notes cannot be used to settle invoices abroad and bank cash shortage, importers will be forced to look for the dollar on the black market. This effectively means trading the dollar against itself.
There seems to be a case of a lot of talk but little action coming our way. Data-driven Fed may leave interests rates lower for longer as report shows the US added fewest jobs in six years last Month. Reading from the past two months, there is a trend of slowing job growth. The answer was not long in coming as the dollar weakened against other currencies globally, a positive scenario for African currencies.
Global markets were buoyant this week. World markets seem rather resilient as despite uninspiring first quarter corporate results, they seem more and more comfortable with the idea of higher interest rates in the US. And aren’t they right to be? Fed Chairwoman Janet Yellen stated Friday that an interest-rate increase may be coming in a matter of “months,” if the economy continues to improve. In short, the Chair seconded what some Fed Officials have been stating for the past weeks. Yellen has continually called for a gradual adjustment to rates conditional to its inflation target of 2%. US economic data have shown some improvement however the latest US inflation rate is 1.1% as published by the US government. As far as African markets are concerned, this means that one is far from returning to pre-crisis interest rates level yet and the fear could be overdone especially when focusing on actual facts and making abstractions of the emotional. On top of that, sentiment also received a huge boost as oil traded above $50 per barrel for the first time in seven months helped by the prices of precious metals such as gold and platinum which witnessed a turnaround.
