Many butterfly wings get markets flapping

Beware the butterfly flapping its wings. In this case, the 0.1 percentage points by which US core consumer inflation exceeded economists' expectations in May.

Data released on Wednesday showed that prices, excluding food and energy, rose 0.3 percent in the month instead of the 0.2 percent average forecast reflected in a Bloomberg survey.

Actual inflation beat expectations for the third consecutive month and brought the US inflation rate over the three months to May to an annualised 5.7 percent. This is way above consumers' long-term expectations of between 2.7 percent and 3.2 percent, revealed by a survey of 500 consumers.

This event in a faraway place could have triggered a perfect storm over South African shores, along with all others.

It strengthened the case for a rise in the federal funds rate from 5 percent when the Federal Open Market Committee meets next week. And investors started to speak of a 0.5 percentage point rise instead of a 0.25 point adjustment, as was the case with the previous 16 rate hikes.

Because higher interest rates offer investors more attractive returns in the US, this scenario should have strengthened the dollar - which would have undermined the already volatile gold price, weakened the rand and taken more money out of emerging market stocks.

But there's always more than one butterfly flapping its wings. So no outcome is guaranteed.

Instead of rising, the dollar snapped a seven-day winning streak against the euro and fell versus the yen on speculation that further interest rate increases would weigh on growth, Bloomberg reported.



The following day, new data showed signs of a manufacturing slowdown in the US, confirming fears about weaker US growth.

Hoping that this would avert a rate hike, equity investors returned to the markets. And on the prospect of an alternative future, world indices gained for a second day, said Bloomberg.

Emerging market stocks rebounded from a near-seven-month low, as some investors judged that recent declines were excessive, given the outlook for earnings and economic growth.

The Morgan Stanley Capital International emerging market index, a measure of stocks in 25 developing countries, climbed for the second day, after slumping to its lowest since November, according to Bloomberg.

Good news on the domestic front was that gold rose by the most in almost a month and the rand rallied, gaining 0.7 percent to R6.799 a dollar. And on the JSE, stocks raced more than 5 percent higher, Reuters reported. The all share index closed at 19 698.9 points.

But along came another butterfly. Ratings agency Standard & Poor's cut Hungary's long-term foreign currency credit rating to BBB-plus from A-minus.

The move knocked the rand, as the currency was often viewed as a proxy for emerging market trades, said Reuters. According to Bloomberg, the unit fell as low as R6.94 a dollar on Friday.

Also on Friday, global markets fell on news that China intended raising its reserve requirements, which will slow one of the world's main engines of growth and dampen demand for commodities.

It was a confusing week. Butterflies will have to learn to move in unison.