US sneezes, South African markets catch a cold

SEVERAL market analysts in recent weeks had observed that the correlation between share prices and the rand/dollar exchange rate was likely not as strong as in the past and that economic effects in China might start to play a bigger role in these markets.

However, last week once again showed how vulnerable South African financial markets were to economic and geopolitical events in the US.

The hawkish fashion in which the Federal Reserve Open Market Committee (FOMC) warned that the quantitative easing in the US (and the current record low bank rate) may come to an end sooner than later, had devastating effects on share prices in South Africa and the rand.

The all share index fell 4.9 percent last week, its sharpest decline since the 15.2 percent decline during the first week of lockdown in March 2020.

The rand had softened by 61c against the dollar last week from R14.70 the previous Friday, to R15.31.

On Wall Street share prices continued to firm, despite the FOMC warning, and on Friday both the S&P500 and Nasdaq indices had wiped out previous losses, trading near record highs again.

Although other factors like the Taliban takeover of Afghanistan, weaker economic data from China, the sharp decrease in the stock prices for Naspers and Prosus, and lower commodity prices, also contributed to the largest sell-off of shares on the JSE, the FOMC minutes did the biggest damage. This despite the news that South Africa’s retail sales had increased 10.8 percent in June over last year and against expectations the inflation rate during July fell for the second consecutive month to 4.6 percent against 4.9 percent in June year.

On the JSE, resources had the biggest sell-off last week as the Resources 10 index lost 7.2 percent. Driven by the sharp fall of 14.5 percent in the price of Naspers, industrial shares also suffered big losses as the Industrial 25 index lost 6.5 percent over the week.

However, the lower than expected inflation rate, and strong recovery earnings by Absa and Standard Bank, contributed to an increase of 2.9 percent in the Financial 15 index, while listed property was up 1.9 percent.

On the capital market, the weaker rand did not affect bond rates as would normally happen and the R186 shortterm treasury rate ended Friday lower on 7.35 percent against the 7.36 percent the previous week.

This week, eyes will be on the release of South Africa’s unemployment rate for the second quarter by StatsSA tomorrow. In the first quarter, the jobless rate had increased to 32.6 percent and it is expected that the rate may touch the 33 percent level.

On Thursday, StatsSA will also publish the July producer price inflation rate (PPI), and mining production numbers for June.