had seemed that our fears may have been misplaced. equity market volatility, as expressed by the vix index, had declined from its highs of 21, 0 in january 2015 to 12, 0 in july 2015, before it increased rapidly to 40, 7 in august 2015, following the devaluation of the renminbi by the peoples bank of china. after this the vix remained elevated, but nevertheless continued its declining trend. volatility in the bond market had also subsided, albeit to a lesser extent. by and large, global markets had tracked sideways. the s & p 500 index in the us had hardly moved from the 2, 100 level, and the us dollar index and treasury bonds were range trading throughout the period. in the domestic markets, things were not much different. the yield on the benchmark r186 bond had drifted slightly weaker, from below 8. 0 per cent to around 8. 25 per cent, and money market yields had also drifted higher. this slight deviation from trends in the us markets was not really a surprise as the monetary policy committee had raised the repo rate by 50 basis points by july and the trade weighted rand had depreciated by around 4. 5 per cent. the only sign of stress at that time was in the us market with the widening of high yielding and other corporate debt relative to treasury yields. however, this was largely seen as a reflection of the impact of lower oil prices on the earnings of oil producers. it therefore bis central bankers ’ speeches appeared as if our concerns about a possible increase in market volatility may have similarly been misplaced. but as has become such a regular feature of financial markets, things were not as benign as they seemed. the first real cracks on the global stage started to show with the sudden decline of the chinese equity markets in june, when the shanghai composite index declined by 32 per cent in less than a month, and a further 16. 5 per cent by the end of august. besides some modest weakness in our local equity market, south africa seemed largely unscathed by these events. unfortunately, this relative stability in our markets was not to last. as we progressed through the third quarter, domestic factors started to have a negative effect on the price formulation in local assets and the market increasingly anticipated further ratings downgrades from the rating agencies. in this vein, south african asset prices, specifically bonds and foreign exchange, weakened in the latter months of the year as market participants

revised the outlook on the rating to negative, a move that was not generally expected by the market. in addition, the changes in the ministry of finance shortly after the ratings action, drew an adverse reaction from the markets and contributed to further significant depreciation. since the low of the rand to the dollar at r16. 87 on 18 january 2016, the rand has recovered considerably. by the close of business yesterday, the rand was trading at r14. 21, an appreciation of 15. 8 per cent against the dollar from the 18 january low. this strong appreciation in the rand was predominantly driven by global factors as the jp morgan emerging market currency index had rallied 9. 8 per cent over the same period. this rally was triggered by a more benign view in the market on the likely trajectory of interest rate bis central bankers ’ speeches increases in the us, unexpected policy stimulus in europe and japan, and improving economic data out of china. portfolio flows to emerging markets, which had been negative in the second half of 2015 and early 2016, reversed into significant inflows in february and march. according to institute of international finance ( iif ) data, portfolio flows into emerging markets totalled usd36, 8 billion in march compared to the outflow of usd53, 7 billion for the second half of 2015. in south africa, portfolio inflow totalled usd1, 6 billion in march compared to outflows of usd2, 2 billion for the second half of 2015. however, local factors also played a role. the budget delivered in february showed strong commitment to fiscal prudence, and the 75 basis points of interest rate increases by the monetary policy committee in 2016 seemed to assure the market of the bank ’ s commitment to maintain price stability. the recent strengthening of the rand is welcomed, following the sharp sell - off late last year. however, as the rand remains vulnerable to negative external and domestic factors, we will need to continue to monitor economic and financial developments in china as a key driver for commodity prices and emerging market currencies. ongoing concerns about a shallow and hesitant global economic recovery ( as again highlighted last week with the release of the imf ’ s world economic outlook ) will also be a key factor. also, the expected trajectory of the policy rate in the united states will be important, with there still being a significant discrepancy between expectations of policy makers when compared to those of market participants, and uncertainties arising from how the fed will factor in what seems