Global stock heads for worst week since 2011
A FOUR percent drop in Chinese shares dealt reeling world stock markets a fresh blow on Friday, as nerves about rising borrowing costs and soaring volatility put them on course for their worst week since the height of the eurozone crisis.
European bourses saw relatively minor early losses but China’s overnight plunge had gouged at confidence again after the second 1 000-point loss of the week for the US Dow Jones Industrial had sent it into official correction territory.
Capital flow figures also showed a record $30 billion (R362bn) had been yanked out of stocks during the rout, though even after that Bank of America’s closely followed “Bull & Bear” indicator was flashing red and warning investors to sell.
“After the moves earlier this week market investor sentiment is fragile and because of this we aren’t expecting the markets to immediately start moving higher once again,” said JP Morgan Asset Management global market strategist Kerry Craig.
“But given that US markets are now in correction territory – with a 10 percent drop since the market peak in January – it’s likely that the most severe gyrations will hopefully have passed,” he added as US futures turned higher.
There was limited reaction as the US government staggered into another shutdown after lawmakers failed to meet a funding deal deadline, but it did play into many of the overarching market concerns that have taken hold this month.
The yield on benchmark 10-year US Treasuries, which tends to be the driver of global borrowing costs, was hovering at 2.86 percent just short of Thursday’s peak and Monday’s four-year high of 2.885 percent.
Europe’s mainstay – German Bunds – were barely budging too at 0.70 percent, as their recent rise in yields left them flirting with another weekly rise, which would mark their longest run of weekly gains in 16 years.
Higher yields are seen hurting equities as they increase loan costs for companies and ultimately consumers.
They also present an alternative to investors who might reallocate some funds to bonds from equities.
On top of pressure from the drop in global shares, Chinese equities had also been hurt by traders closing positions before the Lunar New Year holidays which begin this week.
The Shanghai Composite Index had tumbled as much as 6.0 percent to its lowest since May last year, and the blue chip CSI300 index dived as 6.1 percent.
Both indexes had pruned the losses to just over 4 percent by the time they closed, but it was their largest single-day losses since February 2016.
Frank Benzimra, the head of Asia equity strategy at Societe Generale in Hong Kong, said he was neutral on China equities due to two concerns: valuations on China-consumer-related industries and execution risks on deleveraging, especially financial deleveraging.
Japan’s Nikkei had also shed 2.3 percent, en route to a weekly loss of 8.1 percent – its biggest since February 2016 too.
For MSCI’s broadest index of world shares, the 47-country ACWI the slump was 6.2 percent, which as long as it is more than 6.1 percent when US markets close later will be the biggest loss since September 2011.
At that point, markets were being slammed by worries about Greek debt default and a collapse of the eurozone.
The Federal Reserve was also starting one of its mass bond-buying programmes.
“The correction phase in equities could last through February and possibly into March,” said senior strategist Masahiro Ichikawa of Sumitomo Mitsui Asset Management in Tokyo.
In currencies, the dollar edged up 0.2 percent to 108.985 yen, after slipping 0.5 percent overnight.
For the week, it was on track to lose 1.5 percent against its Japanese peer amid risk aversion in broader markets.
Oil was still slippy with US crude futures down 1.1 percent at $60.53 per barrel after hitting a seven-week trough of $60.27 on Thursday.
Brent crude fell for a sixth consecutive day too, to 0.7 percent to $64.37 per barrel.
As well as all the global market uncertainty, there are signs that supplies could be going up again after Iran announced plans to increase production and data showed US crude output hitting record highs.
Metals took another mauling too. Bellwether industrial metal copper was on course for its worst week of the year so far, having dropped back below the $7 000 a ton mark that had become something of a support crutch. – Reuters THE JSE closed the week at its lowest level in more than four months, with the all-share index shedding more than 1 200 points since Monday.
Media group Naspers led the rout, going down more than 10 percent and leaving the shares under the R3 000 mark for the second time since last August 23.
Sean Ashton, the chief investment officer at Anchor Capital, said Naspers has had a difficult few months.
“Market heavyweight Naspers, which accounts for 20 percent-plus of the JSE’s total market cap, had a less-than-stellar January – down 2 percent monthon-month,” Ashton said.
Naspers closed 1.8 percent lower at R2971 on Friday, taking with it the All Share Index which hit 1.29 percent to close at at 55902.63. The blue-chip top 40 index shed 1.39 percent at 49287.45.
David Shapiro, deputy chairperson at Sasfin Securities, said the global sell-off has largely affected the local bourse.
“The market plunge we’re seeing is more about de-gearing or deleveraging by traders who overextended themselves in risk products, not economic fundamentals,” Shapiro said.
South Africa’s equity returns were robust in the fourth quarter of 2017, with gains recorded across sectors. However, the optimism was quickly tempered by a selloff in global bonds last week, resulting in rising bond yields and falling share prices.
The selloff was accelerated by Friday’s US labour market reports, which showed not only decent payroll growth but also a surprise jump in wage growth to the highest level since 2009.
Faster wage growth could result in higher inflation and therefore speed up the Federal Reserve gradual interest rate hiking cycle.
Izak Odendaal, an investment strategist at Old Mutual Multi-Managers, said local equities are also bucking the global trend so far this year, with the JSE pretty much flat.
“Naspers was down 2 percent in January, but its 20 percent-plus weight in the shareholder Weighted index has a massive impact on the index,” Odendaal said.
“Despite the Naspers loss, industrials were marginally positive in January as consumer goods (Richemont), general industrials, retailers and telecoms posted good gains.”
Nkosinathi Baleni and Mashudu Malema look on as market jitters continued this week.