Global financial markets, both developed and emerging, took a beating during September. This was precipitated by the US Federal Reserve expressing concerns over US growth prospects and coming out with a further stimulus plan. This added fuel to the fire of the European debt crisis. Greece is at the centre of this storm and the world is now waiting for the European Central Bank to come up with a rescue plan that is being hampered by political infighting.

Notwithstanding the US's own debt problems, the US dollar has been seen as the only safe haven in this uncertain world. As a result, over the past month, the US dollar has strengthened relative to the Euro. We have also seen the strengthening of the US 10 year government bond rate. This strengthening has been supported by the US Fed's 'twist' policy of selling short dated US government bonds and buying long term bonds. In this way they are supporting the US housing market where mortgage interest rates are linked to long bond rates.

South Africa has also been caught in this flight to safety with foreigners selling R17.8 billion bonds, as well as R7.9 billion equities over the past month. This has resulted in the sharp depreciation of the rand versus the US dollar from R$7 to R$8.08 over that period. The emerging market bond spread has also been caught in this storm with it increasing by 101 bps to 422 bps and, similarly, the SA sovereign spread increasing by 85 bps to 255 bps over the month. On the back of the lower global growth prospects the oil price has declined over the month. The gold price has, surprisingly, also declined from $1819.75 to $1624.50, but it is really a reflection of the strength of the US dollar. By way of example, the Rand gold price has actually increased from R12 738 per ounce to R13 126 over the month.

The local inflation numbers were somewhat mixed this past the month. CPI came out at 5.3%, in line with last month's number but lower than the expected 5.5%. PPI, on the other hand, came out at 9.6%, which was higher than the expected 9.1% and up from last month's 8.9%. Both the money supply, as represented by M3, and the credit extension growth rates were higher than expected and came out at 6.2% and 6.1%, respectively. The Reserve Bank announced an unchanged monetary policy, retaining the repo rate at 5.5%. They are being torn between a weaker growth outlook and higher inflation expectations that are being exacerbated by the much weaker Rand.

On the back of the sell-off of bonds by foreigners we saw bond rates rising meaningfully and the yield curve steepening slightly. As a result, the All Bond Index (ALBI) had a return of -2.09% over the month. In the money market we also had a steepening of the yield curve over the past month, but this was as a result of the shorter term rates declining on the back of the Reserve Bank's monetary policy stance and the longer term rates rising in line with the bond rates. The money market benchmark Stefi composite had a return of 0.45% over the month.

Weak global growth and its negative impact on the SA growth outlook is likely to keep the Reserve Bank in a fairly dovish mood. As a result we believe that the repo rate is likely to remain unchanged for an extended period of time. The curve ball could, however, be a Rand that remains weak for an extended period of time and the resultant feed-through into inflation. We are, therefore, likely to remain as fully invested as possible to have as little cash as possible earning the call rate.

The world has been watching with more than a passing interest at riots that have been taking place in Greece as the local populace has been objecting to the austerity measures that the Greek parliament has just voted in. This was to ensure that the European Central Bank would make funding available to Greece to avoid a default on their debt. Many see this as just delaying the inevitable, but it does give them time to hopefully grow out of their problems. A near-term default could put the whole European banking system at risk, which could spill over into the global financial system.

In the United States the 2nd round of quantitative easing has just come to an end and this would have been one of the factors that has resulted in the US 10 year government bond rate rising by 16 basis points (bps) over the month to 3.16%. We have also seen a slight weakening in the US $ relative to the Euro. On the back of the US releasing some of their strategic oil reserves we saw the oil price decline by $4.57 over the month to $111.85.

The emerging market bond spread declined from 288 to 262 bps over the month and, similarly, the South African sovereign spread declined from 149 to 139 bps. In line with this reduction in risk aversion we also saw the gold price decline by $30.05 over the month from to $1506.75. The Rand strengthened slightly from R$6.79 to R$6.74 over the month and we saw foreigners as big buyers of local bonds to the tune of R12.8 billion. The local inflation numbers were mixed this month with CPI coming out at 4.6%, up from last month's 4.2% and higher than the expected 4.3%, while PPI came out at 6.9%, higher than the previous month's 6.6%, but lower than the expected 7.1%. Money supply growth, as measured by M3, came out at 6.1% which was up from last month's 6.1%, whereas private sector credit growth came out at 5.2%, which was down from the previous month's 6.2%.

Notwithstanding the foreign buying of local bonds we saw a steeping of the yield curve over the month. As a result the market benchmark All Bond Index (ALBI) had a return of only 0.16% over the month.

We also had a steepening of the money market yield curve over the past month. The three-month NCD rate was once again unchanged at 5.50% and the 12-month NCD increased by 5 bps to 6.35%. The money market benchmark Stefi composite had a return of 0.46% over the month.

Our view remains that we are likely to see the first hike in the interest rate cycle at the November meeting of the Monetary Policy Committee of the Reserve Bank. As a result, we are not looking at entering into fixed rate investment beyond that period. We are prepared to commit funds for up to 12 months, but any investment beyond November will be on a floating rate basis.

The global turmoil over the past month has continued apace. The Japanese earthquake and the resultant tsunami that caused the terrible loss of lives and the uncertainty around the impact of the nuclear fallout from the damaged nuclear power plants has made for an even more jittery international backdrop. The political upheaval in the Middle East and North Africa (MENA) has continued with the Libyan situation resulting in a United Nations supported 'invasion' of the country. The sovereign debt crisis in Europe has deteriorated further and has resulted in a number of the Mediterranean countries being downgraded again.

The only good news has been the positive economic data coming out of the United States. Global growth would appear to be moving ahead and this factor, combined with the MENA situation, has resulted in the oil price increasing by $5.43 to $117.38 over the month. The US dollar has been particularly weak this past month, declining by 3.5 cents to the Euro to 1.416 and by 20 cents to the rand to R$6.75.

We have seen an improvement in the risk appetite of international investors in that the emerging market bond spread contracted by 11 basis points (bps) to 261 bps. Similarly, the South African sovereign bond spread declined by 13 bps to 145 bps. The US long bond rate increased by 4 bps to 3.47%.

The local CPI number came out in line with expectations, unchanged from last month at 3.7%. PPI, however, deteriorated to 6.7%, higher than the expected 6.1% and up from last month's 5.5%. While the Monetary Policy Committee of the Reserve Bank kept the repo rate unchanged at their March meeting, they did warn the market that the risks to inflation were to the upside, driven largely by food and administered (oil and electricity) prices. Money supply growth, as represented by M3, declined over the month from 8.2% to 7.6%, while the credit extension growth rate continued its steady increase from 5% to 5.4%.

Bond market rates rose slightly over the month. As a consequence the market benchmark All Bond Index (ALBI) had a return of 0.49% over the month. The longer dated money market interest rates moved back up over the month whereas the shorter dated rates remained unchanged, being anchored to the repo rate. The three-month NCD rate remained unchanged at 5.5% and the 12-month NCD rate rose by 8 bps to 6.28%. The money market benchmark Stefi composite had a return of 0.48% over the month.

With the risk to inflation lying on the upside, the current debate is all about the timing of the 1st hike in the repo rate. Some commentators see it happening as early as July this year and others as late as the 2nd quarter of next year. Our view remains the 4th quarter of this year, in line with market consensus.

As mentioned last month, as there is the risk that the market starts anticipating future hikes in the repo rate, we will continue to favour the three to six month area. We will remain fully invested in term instruments as we are comfortable that we still have some time on our side before call rates start moving up.

It was recently announced that the Bush tax cuts in the United States that were due to expire at the end of 2010 had been extended by the Obama administration. This has resulted in the growth outlook for the United States being much improved. This stimulus to that economy, together with the 2nd round of quantitative easing has manifested itself in meaningfully higher US bond rates. The US 10 year government bond rate rose by 59 basis points (bps) to 3.39% over the month as longer term inflationary concerns came to the fore.

The US dollar depreciated against the Euro from 1.30 to 1.32 over the month and the emerging market bond spread moved in by 30 bps to 248 bps. The SA sovereign spread also moved in by 27 bps to 143 bps. Foreigners were small net sellers of our local bonds to the tune of R6.9 billion over the past month. Even after the sales over the past two months, foreigners have bought R66.2 billion of our local bonds over the past 12 months. This compares to the R32.7 billion they bought the previous year.

The Rand was strong against all currencies over the past month, improving by 46 cents against the US$ to R$6.63, and reflecting the improvement in the world growth outlook, the oil price increased by $8.53 to $94.75 over the same period.

On the local front the Reserve Bank quarterly bulletin for the 3rd quarter reported that the consumer was recovering and that household consumption was picking up. The money supply and credit extension growth numbers over the past few months have shown that this trend has been continued. The most recent money supply growth, as represented by M3, improved from 6.4% to 7.2% and the credit extension growth rate declined slightly from 5.1% to 4.6%. The inflation numbers over the past month surprised on the upside. CPI came out at 3.6%, up from the previous month's 3.4%, and higher than the expected 3.5%. PPI came out at 6.2%, which was higher than the expected 6%, and down from the previous month's 6.4%.

On the back of the strengthening Rand, bond rates declined across the yield curve. As a result the market benchmark All Bond Index (ALBI) had a return of 1.73%, largely wiping out the negative return of last month. Over the past year the ALBI had a return of 14.96%. On the back of the declining bond rates the longer dated money market rates also declined. The three-month NCD rate remained unchanged at 5.45% and the 12-month NCD rate declined by 10 bps to 5.85%. The money market benchmark Stefi composite had a return of 0.51% over the month.

While the recent Rand strength could be a reason for a further cut in the repo rate, we believe that the signs of the local economy picking up are sufficient to keep the repo rate unchanged for an extended period of time.

Even though the money market yield curve has steepened even further over the month, we are favouring the three month area in an endeavour to keep our exposure to call as low as possible. As we do not see interest rates beginning to rise for an extended period of time we will remain fully invested, keeping the weighted average term of the fund as long as possible.