Waiter…

After all the excesses of Freedom Day, to see the stock market gapping 1.5% lower at its open yesterday, is like having a jug of ice cold water poured over your head.

Shaun le Roux, at Alphen Asset Management says that while we were sipping Pina Coladas on Wednesday, global stock markets retreated further with poor economic data coming out of the US, Germany, France and Japan.

Not even a dip in the oil price has been able to support equity markets and concerns over increasing signs that global growth is slowing have seen commodity prices dropping sharply. US consumer confidence slumped to five month lows, and there is healthy debate in the market around the ability of the US economy's backbone, the US consumer, to absorb higher interest rates.

Some are even questioning whether the Fed will increase rates at all at their meeting in early May.

This may be jumping the gun a bit, with another increase looking a foregone conclusion, but the fact remains that slowing growth, with high oil prices part of the problem, may see the pace and degree of rate hikes in the US falling well short of expectations and topping out at levels well short of those associated with a normal economic cycle.

By failing to raise rates much above the current 2.75% levels, the Fed may succeed in propping up consumer spending, but this situation is not sustainable. The trade-off is between growth and inflation.

On the one side, negative to low real rates have inflationary consequences while on the other cheap money has played no small part in the strong economic growth seen in 2004. At some point either inflationary pressures or further deterioration in the current account deficit (or both) will force the Fed to raise short rates to more normalized levels (of say around 5%).

If the economy is not in shape to take normalized rates in its stride, the potential outcome is ultimately deflationary. The longer they leave this, the more dire the potential consequences for the economy. Right now, US bond and stock markets are telling you that they don't like the prospects for the economy.

After a poor opening on our market yesterday, the day got worse as the selling intensified after Wall Street opened to further weak economic data in the form of weaker than expected Q1 GDP growth data for the US.

On the JSE, the All Share ended yesterday down 2.5% with resources losing 4.4%. Clearly, reduced appetite for cyclical stocks, lower commodity prices and a remarkably robust rand took their toll on the commodity shares. Billition, one of the star performers on the JSE year to date, was hammered by 6%, while the other powerhouse of 2005, Sasol, lost 4%.

What has been a bit surprising has been the resilience of the rand, and the Aussie dollar, in the face of a stronger dollar and sharply lower commodity prices. Despite the best intentions of the MPC, and their unexpected rate cut, and a sell-off on the local stock market, the rand has been gaining against the greenback.

Over the short term, the Barclays / Absa deal has definitely seen foreign exchange dealers hesitant to be short of rands as a R30 billion inflow is not to be trifled with. Rand dollar movements over the recent past can predominantly be explained by euro/dollar changes.

This means that currency traders are currently not looking much beyond the US dollar for direction on the crosses. Ordinarily, traders would be looking to movements in commodity markets to lead their positions in the so-called commodity currencies including the rand and the Aussie dollar, but at the moment all eyes are on the US dollar.

Given the potential for further weakness in the dollar on the back of its mounting and frightening deficits, one has to factor in the possibility that the rand can go stronger.

However, there are a few factors that cause us to question the sustainability of a super-strong rand, these include: a deteriorating current account (particularly in the event of softer dollar commodity prices), the short-term nature of capital flows to date (Barclays the notable possible exception), a realization (at last!) of the consequences of a strong rand on our export economy and the fact that the Reserve Bank will continue to cut rates and boost reserves.

So, while the rand holds onto these levels, pressures will be mounting, and, unfortunately, the chance of a sharp move downwards increases. We have not factored a sub-6 rand dollar at the end of year into our models and continue to advocate that now is a good time to diversify assets to include offshore exposure.

By the way - why are so many of our public holidays in the middle of the week? Great for SA Breweries but very bad for productivity levels in SA. Makes no sense to me. Answers on a postcard to President Mbeki please.