Shadow of Covid-19 triggers volatility worldwide

DESPITE other economic data and financial market news, Covid-19 overshadows all and is dominant in asset prices on financial markets across the globe.

The biggest volatility on share and bond markets was experienced last week as share indices varied from gains of about 4 percent on one day, only for a sell-off of more than 4 percent the next day.

It seems that the decision of the US Federal Reserve to lower its bank rate by 0.5 percent contributed – contrary to what would have been anticipated by the Fed – to more volatility, with bond yields tumbling and the dollar staying under pressure.

At the close on Friday, the S&P 500 index traded 7 percent lower than the previous Friday.

Emerging markets were hit hard as investors were desperately looking for safe havens.

Even the gold price had some volatile movements and traded in a range of close to $100 (R1 567) per ounce over the past 10 trading days. The metal, however, ended the week higher at levels about $1 655 per ounce.

Brent crude stayed under huge pressure as the price for Brent tumbled, particularly on Friday to $46.84 per barrel. This was more than $6 or 11 percent lower than the level of $53 per barrel the previous week.

Locally, the announcement by Statistics SA that the economy was in a technical recession for a second time in two years came as a shock.

Not only had the economy grown negatively by -1.4 percent during the fourth quarter last year, but had a record contraction for three of the four quarters in 2019.

Power cuts had a devastating effect on output, as business and consumer confidence dropped. Companies have indicated that they are likely to cut jobs by more than 10 000 in 2020.

Together with the news that Covid19 was detected for the first time in South Africa on Wednesday, the rand depreciated and bond rates increased at the end of last week, after a recovery earlier in the week.

The exchange rate against the dollar ended the week mostly flat, at R15.67/$, the same as the previous Friday.

Despite the contraction on international equity markets, shares on the JSE started to recover last week. The FTSE/JSE All Share Index closed on 52 065 points on Friday or 1 027 points (2 percent) higher than the 51 038 of the previous Friday.

The industrial board had a very good week, as the Industrial 25 index improved by 3.6 percent.

The Resources 10 index improved by 1.9 percent and the Listed Property index, for the first time this year was on the winning side with an improvement of 2 percent.

The weaker rand took its toll on the financial board, as the Financial 15 index lost another 1.4 percent last week and was down by 12.6 percent since the outbreak of Covid-19.

Due to the sharp decrease in the oil price it is expected that the price of petrol and diesel will decrease sharply at the beginning of April, despite the levy of 25 cents per litre that will come into effect on April 1.

On Friday, the Central Energy Fund had published in their daily report on fuel prices, that since February 28 (when the previous prices were set) 95 octane petrol was over-recovered by 62 cents and diesel by 77 cents.

Although the rand had depreciated strongly at the end of last week, the price of Brent crude had dropped by more than the weakening of the currency. A sharp decrease in fuel prices at the beginning of April (the second consecutive month) might just be the spark for a turn-around in consumer spending.

The positive effect of such a decrease on inflation expectations might just contribute to a possible large cut in the repo rate by the Monetary Policy Committee at their meeting at the end of the month – a cut that is long overdue.

Dr Chris Harmse is an economist and chief investment officer.