Equities sell-off continues amid rate hikes fears

GLOBAL and domestic financial markets last week started to increase their volatility and uncertainty on the back of more evidence of stagflation across the world.

The ongoing negative impact of the Russian-Ukraine war, as well as renewed cases of Covid-19 variant infections are contributing mostly to negative economic prospects for the next two years.

The aggressive interest rate increase scenario stance by the US Federal Reserve at their last two meetings in April and May brought about fears of a repetition of 2009, when the sharp increase in the US bank rate triggered the sub-prime crisis that led to the worldwide recessions.

Many studies concluded that the increase in oil prices from $40.71 (about R649) per barrel in December 2004 to $144.96 in July 2008 had made a “material contribution” to the subsequent US inflation fears, higher interest rates and therefore the financial crisis and world recession.

These fears now seem to be starting to repeat themselves, as risky assets like equities experienced a big sell-off last week. The US inflation rate doubled from 4.2 percent in April 2021 to 8.5 percent in April 2022.

On Wall Street, the three main indices continued their downward movement – a correction. The Dow Jones industrial index closed on Friday down 0.3 percent, losing 5.5 percent from the beginning of April and is already 9.5 percent lower for the year-to-date.

The Nasdaq also continued its downward trend and traded on Friday 15.6 percent lower for the month and already has lost 21.27 percent for the year-to-date.

The main index on the Wall Street board, the S&P 500, is down by 9.3 percent since the beginning of April and now trades down 13.4 percent since the beginning of the year.

On the JSE, the same pattern manifested itself as share prices contracted considerably over the last two weeks and last month. The all share index lost 6.2 percent alone last week, and traded down 10.1 percent over the last month. It is now 7.7 percent lower since the beginning of the year. The same tendency occurs for most other indices on the JSE.

The Industrial 25 index was down by 9.2 percent since the beginning of April and lost 21.8 percent for the year-to-date. The resources sector experienced a bumper upward rally during the first quarter of 2022 as the Resources 10 index gained 16 percent, only to lose 11.5 percent over the last month and 7 percent alone last week. The index is now only 2.6 percent higher for the year to date.

The same tendency occurred among financial shares. The Financial

15 index sold-off by 6.9 percent last week, losing 13.6 percent over the past month, although the index remains positive for the year at a gain of 3.5 percent.

The rand exchange rate managed to keep its value constant since the beginning of the year against all three main currencies.

Although the rand lost 140 cents, or 9 percent, since the beginning of April, when the currency was still trading at R14.57, to R15.97 to the dollar on Friday, it remains level with its value of R15.95 of December 31, 2021. The same tendency appears with the pound.

The rand lost 50c from R19.22 to R19.72 against the pound over the past month but is still 187c stronger than the R21.59 at the beginning of the year. Against the euro, the rand depreciated by 80c since April 1 to R16.83 on Friday, but is still 196c stronger than the R18.15 at the beginning of the year.

The further worrying aspect that equity markets face is that the Absa Purchasing Managers’ Index (PMI) fell sharply to 50.7 index points in April, against the 60 points in March. An index value bigger than 50 points towards expansion in the manufacturing sector and lower than 50 to a contraction. This value is lowest since the looting in KwaZulu-Natal (KZN) looting in July last year. Lower business activity and weaker new sales orders drove the index down considering the KZN floods that led to serious infrastructure damages.

This week on Thursday, StatsSA will release the March mining and manufacturing production figures.

On global markets everybody awaits the release of the US inflation rate for April.