It’s a ‘Black Wednesday’ for investors
Key index of world stocks in bear market
GLOBAL markets tumbled yesterday as the fallout from the unrelenting oil price slump worsened and investors opted to pare back exposure to equities, sending a key index of world stocks into bear market territory.
The rout, which some described as “Black Wednesday”, served as a reminder of the fragility of investor sentiment, following more signs of a slowdown in China, the world’s second largest economy and the biggest consumer of many of the world’s minerals.
As the demand for commodities ebbs, the risk of economic dislocation in the countries that are heavy exporters of natural resources like South Africa becomes greater. The rand, like other emerging market currencies, also retreated.
For most of the session, the currency, which dropped 25 percent last year and fell a further 8 percent since the start of 2016, flirted with the R17 level against the US dollar throughout yesterday’s session.
Risk re-pricing
Market analysts said there was a generalised re-pricing of risk, forcing investors to drive money into safe-heaven assets like gold and US treasuries.
Gold climbed to the highest level in more than a week. On the Johannesburg Stock Exchange, gold producers were the sole bright spot in a broadly downbeat market.
Platinum producers, consumer, financial and transportation stocks were among the top drags. Wall Street saw no reprieve, with the Dow Jones industrial average falling more than 400 points at one stage during New York trading.
But heading into yesterday’s session the market was already on edge after the International Monetary Fund (IMF) forecast a dismal outlook for the South African economy. It cut its outlook for 2016 gross domestic product to an abysmal 0.7 percent from an October forecast of 1.3 percent.
At that rate, the SA Reserve Bank finds itself confronted with stagflation – an environment where growth is stagnant and yet inflationary pressures are mounting because of a weaker currency and fallout from the worst ever drought to hit the country in more than a century. Add to that concerns about slowing demand from China, and the challenge facing the country soon becomes very worrying, according to analysts.
Warren Jeffrey, a portfolio manager at Nedbank Online Trading, said markets were at a precarious point yesterday, with investors speculating that China might announce another wave of stimulus measures.
Data released on Tuesday showed that the Chinese economy slowed in December, capping the weakest quarter of growth since the 2009 recession.
Fredi Heyneke, a portfolio manager at Afrifocus Securities said that yesterday’s slide had effectively reversed all of Tuesday’s gains when the JSE’s all share index had rallied by 1 000 points.
“The major reason is the IMF’s global economic forecast, which has accelerated the negativity. Some of the shares are giving back the gains they made on Tuesday,” he said.
“On top of that, we have been getting negativity from the oil price and the speculation about interest rates by the Reserve Bank next week.”
Bear market
At yesterday’s close, the JSE’s all share index was down 2.73 percent or 1 297.98 points, at 46 329.78 points. Yesterday’s losses took the benchmark index closer to bear market territory, as it is now down 17 percent from its record of April 2015.
Meanwhile, the MSCI world equity index slumped 2.6 percent to its lowest level since July 2013. The index has already dropped 11 percent in January, which if sustained would be the worst monthly loss since October 2008, the month after Lehman Brothers went bankrupt.
The declines left the index down 20.8 percent from its high on May 22, confirming a bear market on an intraday basis, generally defined as a drop of more than 20 percent.
Oil extended its decline from the lowest close in more than 12 years on signs of a glut in oil supplies as Iran prepares to start exporting crude following the lifting of sanctions.
The rand fell 0.4 percent to R16.8457 against the dollar, reversing an earlier bounce of 0.5 percent as SA Reserve Bank governor Lesetja Kganyago quashed speculation of heftier rate hike increases to wrestle inflation.
“Given where the policy rates are, a 25 basis-point hike is not a small hike necessarily,” he said in an interview on the sidelines of the World Economic Forum’s annual meeting in Davos, Switzerland. – With additional reporting by Wiseman Khuzwayo and Bloomberg