I don’t think that any of us will ever forget the events that took place in the United States of America on 11 September 2001. The unprecedented terrorist attacks on the World Trade Centre and on the Pentagon sent shock waves around the world, highlighting that no country is invincible, even the USA. These events, and their ramifications, will not be swept under the carpets of history. As I write this newsletter, the extent of the retaliation by the United States and its allies is still unknown and is yet to unfold. However, it appears as if a measured response as apposed to an open declaration of war may be evolving – many attribute this to the presence of Colin Powell, who will try to lend a measure of restraint in these unenviable times.
The terrorist attacks on the USA could not have come at a worse time. As at 11 September 2001 the economy in the USA was slowly starting to show signs of an improvement and consumer confidence, having so recently been at sensitive levels, had been bolstered by the Federal Reserve’s 7th interest rate cut. Many economists were becoming cautiously optimistic about an improvement in economic growth figures commencing toward the end of the 4th quarter of 2001 and during the 1st quarter of 2002. These sentiments were fuelled by the fact that the USA had avoided plunging into a recession during the last 18 months (a recession being two consecutive quarters of negative growth), as had earlier been feared, and the dollar had finally started to move off its unsustainable highs of recent months.
On Monday, 17th September 2001 the Federal Reserve in the USA cut short interest rates by 50 basis points to 3%. This was the eighth rate cut this year, bringing short term rates down to their lowest level since September 1992 – this was done primarily to make money more accessible to consumers and to help ward off a potential recession caused by panic selling. The rate cut was announced an hour before Wall Street opened, after having been closed for 4 days – the longest closure since the Great Depression. It has been speculated that the reason for this timing was a deliberate move by the Fed to boost consumer confidence – it was important that it should not be seen by investors as simply being a means of bolstering the markets during the first day of trade on Wall Street following the tragedy. This move by the Fed was a clear sign that they are prepared to do whatever is necessary to maintain consumer confidence.
The EuropeanCentral Bank (ECB) followed the lead of the US Federal Reserve by announcing a 50 basis point cut in key interest rates, bringing rates down to 3.75% from 4.25%. Although this announcement was also made on the 17th September 2001, it followed three hours after the US Federal Reserve announcement – allowing the positive impact of this good news to be maximised.
As mentioned in the previous newsletter, higher oil and import prices, together with slowing growth, continued to be the main contributory factors to the interest rate policy dilemma that had been prevalent in Europe. The ECB were reluctant to cut rates in the recent past due to inflationary pressures brought about primarily by the “knock-on” effects of a higher oil price experienced over the past year. The oil price has moved off its previous highs and inflation in the EU is currently closer to target than before, thus supporting the move to cut interest rates.
The oil price moved to $31 per barrel on the news of the terrorist attacks, but dropped to $23 per barrel on Monday 24th September 2001 fuelled by concerns of a global economic slowdown. OPEC met during the last week of September to discuss reducing output in view of the fact that the price per barrel was within the acceptable band of $22 – $28. OPEC stated at the meeting that they would maintain current levels of output for the time being – the next meeting is scheduled for November 2001. The price per barrel ended the quarter at $21.88.
In line with expectations, the Bank of England announced a 25 basis point cut in its key interest rate on Tuesday 18th September 2001, bringing rates from 4.75% down to 4.50% – a 40 year low. Although inflation is below the Bank of England’s current target of 2.50%, forecasts for inflation have moved higher.
The South African Reserve Bank’s Monetary Policy Committee cut the Repo Rate by 50 basis points during the second last week of September, as anticipated, with the large commercial banks consequently reducing their mortgage rates. The Rand has been under pressure recently, with the exchange rates ending the quarter at £13.25 / R1, $9.01 / R1 and Euro 8.20 / R1. The Rand has tested new lows against all the major currencies and on a trade-weighted basis in the last two weeks of this quarter. The weak rand, which makes our exports competitive, has helped to boost local GDP growth, thereby reducing the direct negative impact of the global slowdown on the South African economy. The weak rand is not good news for potential inflationary pressures, however, which if they do materialise, will not bode well for the much hoped for interest rate cut later this year.
How did the markets end the third quarter (30 September 2001)?
While it is not our policy to encourage investors to focus on short term market performance, it is natural to want to know exactly what the impact has been on the markets since 11 September 2001.
The above graph illustrates the performance of the MSCI Index for the period 10 September 2001 to 28 September 2001 – the index came off 4.35%. In comparison, the FTSE moved down by 3.22%, the S&P 500 lost 5.11% and the Nikkei retreated by 4.64% over the same period. In Europe, the CAC 40 lost 7.62%, while the DAX moved down by 9.28%.
World markets are likely to remain volatile until the full extent of the retaliation by the United States is known. It is encouraging to note that the USA presently enjoys unprecedented support from the global community. The channels of communication between many countries have been opened following the recent terrorist attacks and this should go a long way in extending global free trade.
The following graph emphasises two important points: firstly, the markets have endured many world crises and crises are likely to continue to present themselves in the years to come. Secondly, the markets have historically shown resilience. It may be difficult to take comfort from these words during these troubled times, especially since it is difficult to find an analogy in the history books for this current event, but history has proven that over time a recovery follows.
Crises and the markets
The above graph echoes our sentiments that it is the time spent in the markets and not the timing of the markets that makes the difference. It is important, in challenging times like these, to remember the original reason for being invested in the markets. All eyes will continue to remain focused on the USA – perhaps the current situation is best summed up by Abraham Lincoln, who was quoted as having said the following, during the civil war: “The dogmas of the quiet past are inadequate to the stormy present. The occasion is piled high with difficulty and we must rise with the occasion. As our case is new, so we must think anew and act anew. We must disenthrall ourselves and then we shall save our country.“
This report is based on information sourced from various institutions, both local and international. The report reflects a variety of views and is not intended to convey investment advice. Please consult us to obtain specific advice relevant to your investment portfolio.