Inflation fears behind sell-off on local markets
SOUTH Africa’s financial markets have experienced a large decline since Wednesday.
Share prices, bond rates and the rand had their worst two days of trade on Thursday and Friday.
One could argue that financial markets would have suffered in the wake of the shocking unemployment number of 32.5 percent in the fourth quarter of 2021 and the Budget forecasting very low economic growth over the next three years. But this was not the case.
The reaction to the Budget domestically and globally was quite positive, as the rand appreciated strongly to levels around R14.40 to the dollar during and after the Budget speech.
On Thursday and Friday, the JSE lost more than 3 percent, while the rand easily broke back through the R15 to the dollar level, again trading at R15.02 on Friday afternoon. This was the biggest decline out of 27 emerging-market currencies.
The rand lost 2.6 percent against the dollar over the week. Against the pound sterling, the currency depreciated by 37 cents to R20.95, and against the euro, the rand moved weaker for the week by 43c and traded at R18.23.
Bond rates increased by 3.8 percent over the week, in reaction to South Africa’s soaring national debt and global inflation fears.
The big sell-off on domestic markets can be summarised in one word: inflation. Expected increases in economic growth post Covid-19 saw bond yields surging, as investors fear hikes in interest rates in the US amid an inflation spike.
On Wall Street, the S&P500 was down 2 percent on Thursday and opened 0.3 percent lower on Friday.
The US 10-year treasury yield increased sharply to above 1.5 percent, as inflation fears led to panic on the bond and equity markets.
Tech stocks were sold off heavily as the Nasdaq lost more than 5 percent over the week.
Emerging-market bonds and equities were hit the hardest as they braced for capital flight, as a downward correction in bonds, currencies and shares becomes more and more imminent.
The JSE had a mixed and nervous week, with most indices ending the week in the red. The FTSE/JSE All Share Index lost 2 percent to 66 138 points after its record level of 67 465 points at the close the previous Friday.
The Industrial index was hit hard. The index tumbled 4.4 percent on the previous Friday’s close.
The decline in commodity prices and fears of global interest rate hikes exacted a big toll on resources on Friday, after a strong first three days last week. The Resources 10 index ended the week up by only 0.6 percent. The gold price decreased by $43 (R649) (2.4 percent) to $1 739, and platinum contracted by $112 (8.6 percent) over the week to $1 187.
The weaker rand continued to put pressure on the financial board. The FIN15 index was traded down by yet another 1.4 percent to 12 200 points.
Surprisingly, listed property turned around last week, and the index gained 1.8 percent.
This week, all eyes will be on the release of South Africa’s total new vehicle sales today. Absa will announce its Manufacturing Purchasers Managers’ Index (PMI) tomorrow.
The IMS Markit PMI for February will be published on Wednesday.
On global markets, all eyes will be on the US job data (non-farm payrolls) for February, which will be released next Wednesday, Thursday and Friday. The unemployment rate, jobless claims and the labour participation rate will be the most important data.
Canada and Australia will announce their gross domestic product growth rate for the fourth quarter of last year
Most developing countries will release their latest PMI indices and retail sales data. Germany will publish its latest unemployment numbers.