Global headwinds overshadow euphoria from President’s Sona
DESPITE the positive domestic sentiment around the State of the Nation Address (Sona) by President Cyril Ramaphosa last week, increased global risks dominated negative sentiment towards emerging markets, including South Africa.
The impact was that the rand depreciated last week and share markets were on the back foot.
The news that the US-China trade war was likely to continue and that renewed tariffs would be imposed at the beginning of the next month, as well as worse than expected lower economic growth prospects for Germany and Europe affected financial markets negatively.
US and European stocks fell sharply from Wednesday, as concern mounted after Australia’s central bank joined European officials in tamping down forecasts for global growth.
Treasury bond yields gained as a result and emerging market assets were sold throughout last week.
Foreign investors also are bearish on the Sona as they still await clear policy implementation and not only promises by the ruling party.
It seems that Ramaphosa’s plans to fix the economy, including breaking up the state-owned power entity Eskom, did not prevent markets turning bearish on the rand, with investors looking ahead to the budget speech on February 20 and national elections in May.
On the JSE, almost all indices recorded a strong contraction last week, wiping out most of the gains made since the beginning of the year.
The all share index lost 686 points, or 1.2 percent, meaning that it was now only 508 points, or 0.9 percent up for the year.
The industrial 25 index was down 1 percent last week.
The resources index lost almost 500 points, or 1.1 percent, despite the weaker rand.
Given the softer local currency, financial shares were sold off and the financial 15 index lost 553 points, or 3.1 percent.
Listed property remained flat, losing only 0.2 percent. It was expected that the share market would remain uncertain and volatile during the next two weeks on the budget speech, clarity over Brexit and the US-China trade war.
Given the sudden rise in global economic and market risks for emerging countries, the rand turned around last week and depreciated strongly.
It lost 30 cents or 2.5 percent to the dollar last week from R13.30 the previous Friday to R13.60 on Friday. It closed at R13.62 to the greenback.
Against the euro, the rand traded weaker by 17c or 1 percent last week and against the pound the currency depreciated by 20c or 1.1 percent, trading at R17.60 on Friday evening.
This week investors will concentrate on South Africa’s unemployment data for the fourth quarter last year.
Statistics SA will also release the latest retail sales and mining production figures. Globally a lot of countries will release their gross domestic product growth rates for the fourth quarter, including Germany, Netherlands, Poland and Portugal – and overall EU data.
Most developed countries will also publish their latest inflation rates, retail sales and manufacturing production data.
Given the weaker rand and higher average oil price, the price for petrol is currently under-recovered by 32c a litre and diesel by 45c a litre.
If the rand exchange rate continuous to weaken this week, consumers could expect to face a big increase in the fuel prices at the beginning of the next month.
Chris Harmse is the chief economist Rebalance Fund Managers.