Covid-19 spike in China sours risk sentiment in local, global markets

SOUTH African stocks and currency markets began the week by following their global counterparts as the market sentiment was dented by worries about a rise in Covid-19 cases in China and tightening restrictions amid the expected domestic interest rates hike.

The JSE All Share Index fell 0.9% yesterday to 71 938 points while the rand moderated to R17.33, 9c lower, against the US dollar after weakening to R17.46 during early trade.

China yesterday reported its first deaths of Covid-19 patients in nearly six months as the country struggles to contain a surge in cases across multiple cities. The country’s National Health Commission reported two deaths of Covid-19 patients in Beijing for Sunday, following the death of an 87-year-old man in the capital on Saturday.

As a result of China’s tough zeroCovid strategy, the world’s second largest economy is implementing a variety of lockdown measures to contain the various. This has disrupted global supply-chains, spooking investors who have fled to safe havens currencies such as the dollar

TreasuryONE currency speciality Andre Cilliers yesterday said the Covid19 spike in China had soured risk sentiment. “A record daily spike in Covid cases in China has turned risk sentiment negative as fears of stricter lockdowns weigh on markets,” Cilliers said.

“Currency, commodity, and equity markets are mostly weaker. The dollar is further supported by fears of an escalation in the Russia/Ukraine conflict as well as the continuing hawkish stance of the Fed.”

The rand has not reacted materially even to the positive outlook given by S&P Global on Friday as the ratings agency left South Africa’s sovereign debt unchanged at junk status. S&P said the positive outlook reflected its expectation that a net external creditor position, a path toward fiscal consolidation, and the implementation of some structural reforms could lead to an easing of fiscal and economic pressures.

It did, however, warn that it could revise the outlook to stable if external or domestic shocks subdue South Africa’s economic growth over the forecast period, or if fiscal financing or external pressures significantly increase. Investec chief economist Annabel Bishop yesterday said the implementation of stage 5 load shedding had also weakened the rand as Eskom ramped up its power cuts.

There is also growing expectation that the SA Reserve Bank (SARB) will hike its policy interest rate by another 75 basis points on Thursday amidst sustained risks around the inflation outlook, including a softer rand exchange rate. SARB Governor Lesetja Kganyago said recently that South Africa still has space to raise interest rates, citing the need to get inflation expectations more anchored around the midpoint of its target range of 3% to 6%.

Headline consumer inflation is set to ease slightly from the 7.5% recorded in September.