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Africa could be about to benefit from dovish policy shifts in the US

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Central bankers across Africa are paying special attention to the noises coming out of the U.S. Federal Reserve as they mull impending calls on monetary policy easing.

On Thursday, the South African Reserve Bank announced its first cut to interest rates in over a year, lowering rates by 25 basis points to 6.5% as the continent’s most industrialized economy tackles low inflation and its starkest contraction for over a decade in the first quarter.

Ghana, Nigeria, Kenya and Angola will all set rates this week. Nigeria recently passed measures compelling banks to boost lending, while a drought in Kenya drove up inflation.

“Monetary policy in Africa has been held hostage to the Fed hiking cycle for the past 18 months, with African central banks maintaining nominally high domestic interest rates to protect their currencies against capital outflows, despite an improving inflation outlook,” Ipek de Vilder, European executive director at international brokerage network Auerbach Grayson, told CNBC.

“The policy is working as 2018 was the first year since 2015, when African currencies were essentially flat vis-à-vis the U.S. dollar relative to annual deprecation about -10% over the previous four years,” she added.

When the Fed tightens policy for an extended period it tends to lower demand for traditional U.S.-based safe haven assets, sending investors searching for return elsewhere. This often facilitates a windfall for emerging markets and causes central banks to mirror Fed measures to stabilize supply and demand.

The recent shift to a more dovish tone from the Fed has allowed African central banks to begin a cautious easing of their domestic monetary stances, with rate cuts so far this year in Nigeria, Kenya, Tanzania and Malawi. Ghana’s monetary policy committee on Friday voted to maintain its current policy rate of 16%.

Thus far, these have been within the 50 to 100 basis point range, though with inflation generally on the slide, de Vilder suggested that further easing of monetary policy could be due this year. While all are due to vote on rates before the U.S. central bank makes its decision on July 31, the Fed’s dovish stance might lessen pressure on tightening and provide room for easing.

“As rates trend downwards, we are likely to see domestic institutions shift back towards higher equity allocations and underpin a rerating of the market,” de Vilder said.

Roadside vendors in Lagos central district, Nigeria.

Pius Utomi Ekpei | AFP | Getty Images

Beware the headline figures

In the context of escalating geopolitical and market uncertainty in developed economies, investors are increasingly likely to explore opportunities in “frontier” markets, according to Jeff Gable, head of research at pan-African bank Absa Group.

“I do think this is the place to be for the next 10, 20, 30 years but that doesn’t mean every day is going to be easy,” Gable told CNBC on Friday.

He stressed the importance for international investors of looking beyond the headline figures, which in aggregate terms are weaker now than they were a few years ago.

“African economies tend to be less diversified and the markets tend to have a large reliance on the informal economy. This makes it more complicated in comparing countries. For example simply looking at debt to GDP (gross domestic product) in isolation, l might not provide a useful picture. What is the debt level as compared the country’s ability to generate tax revenues, for example, or as compared the level of interest rates?” Gable explained.

The other key draw for investors in the coming years is going to be the continent’s “insatiable appetite for infrastructure,” he projected.

Structural case

Voters want clean water, access to roads, housing, a health care system and education for their children, all of which cost governments money but are indispensable at the ballot box.

“In an environment where the balance sheet is more constrained, governments are going to have to be reaching out to the private sector to look to provide infrastructure services, so those companies that are exposed to this are going to be more attractive,” Gable explained.

De Vilder also highlighted trends of generally higher GDP growth, underpinned by relatively young populations, relatively low debt and urbanization.

“In the 1950s in Africa only 20% of the population was living in the cities, these days 40% and by 2050, we are expecting this number to increase 75%. This will mean increase labor productivity, specialization and increased consumption,” she said.

At present, only 19% of African nations’ trade happened within the continent in 2018, compared to 59% and 69% for Asian countries’ intra-Asia trade and European countries’ intra-Europe trade respectively, according to Brookings Institution’s January numbers.

But the recent creation of a colossal 54-nation trade agreement, the African Continental Free Trade Area, could be set to change all that.

If the massive deal works as hoped, it will connect 1.3 billion people, create a $3.4 trillion economic bloc, and improve commerce within the continent itself.

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North Korea seen to have launched missile, Japan coast guard says

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North Korean leader Kim Jung-un inspects Galido outpost and Jangjedo defending force located in the far south of Southwest sea in North Korea in this undated photo released by North Korea’s Korean Central News Agency (KCNA) in Pyongyang November 13, 2016.

KCNA | Reuters

North Korea was seen to have launched a missile, Japanese coast guard officials said Friday. The launch comes a week after another round of missile tests.

The Japanese Defense ministry confirmed to NBC that a projectile appears to have been launched from North Korea, but it has not reached Japanese territory or the Exclusive Economic Zone.

The Yonyap news agency, citing South Korean military, reported that North Korea fired two projectiles into the sea off its east coast. 

South Korea’s joint chiefs of staff said North Korea fired them from around Sondok, South Hamgyong Province, according to Yonhap.

South Korea’s presidential office is holding a National Security Council meeting concerning North Korea’s projectile launch, the office said in a statement

Reuters and NBC News contributed to this report. 

This is breaking news. Please check back for updates.

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Bank of England Governor Mark Carney says trade war hurts confidence

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Mark Carney, Bank of England Governor, in an interview in Washington, D.C. on October 13, 2017.

Isabella Basco | CNBC

Bank of England Governor Mark Carney said the world’s reliance on the U.S. dollar as a reserve currency is too risky and proposed a new digital currency to replace it.

“In a multi-polar world, you need a multi-polar currency,” he told CNBC’s Steve Liesman at the Federal Reserve’s annual conference in Jackson Hole, Wyo.

Carney said a new digital currency based on a global basket of goods would provide equilibrium to a system where some countries have moved to zero or negative interest rates, while others, including the U.S., remain positive.

“The question is how do you get there,” he said. “You don’t just jump to something new over night.”

Carney also said the trade war is dampening business confidence around the world. Disruptions in supply chains in the auto, steel and technology sectors, for instance, and taking their toll even among nations that are not directly involved.

“Those effects are impacting all of the economies around the world,” he said. “Whether you’re directly involved or not it’s impinging on the outlook.

Carney, a banker and economist, was once thought to be the next head of the International Monetary Fund, but he didn’t get the required backing from European governments. He has headed England’s central bank since July 2013.

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Fed Vice Chair Clarida says the global economic outlook has worsened

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Federal Reserve Vice Chair Richard Clarida said Friday the global economy has deteriorated in the past month.

“Obviously, the global economy has worsened since our July meeting,” Clarida spoke to CNBC’s Steve Liesman on Friday from the Fed’s economic policy symposium in Jackson Hole, Wyo. “The global economy is slowing and there’s powerful disinflationary pressures.”

However, Clarida said the U.S. economy is “in a good place,” adding he doesn’t see a heightened recession risk.

“I think you have to look at a broad range of indicators, but the ones I focus on are not signalling an elevated risk of a recession,” Clarida said. “My guess is next year the economy will be at or above trend growth under appropriate policy.”

Stocks plunged on Friday as the high-stakes trade war between the U.S. and China deepened, with the Dow Jones Industrial Average tumbling as much as 745 points. The critical spread between the 10-year Treasury yield and the 2-year yield also inverted amid the market turmoil, sending a recession warning.

Richard Clarida

Scott Mlyn | CNBC

China vowed to retaliate with tariffs on $75 billion more of U.S. goods and resume duties on American autos and components. President Donald Trump struck back at China’s countermeasure, saying he’s ordering American companies to immediately start looking for an alternative to China.

Trump also lashed out at Fed Chairman Jerome Powell yet again, this time questioning whether he is a “bigger enemy” to the U.S. than Chinese President Xi Jinping.

Powell said in his annual remarks at the symposium that the global economic outlook “has been deteriorating ” and there is no “rulebook” on trade wars. He promised that the Fed “will act as appropriate to sustain the expansion.”

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