World and SA markets recover quickly

Despite huge volatility and uncertainty on global financial markets last week, South African equity, bond and foreign exchange markets remained stable and even improved.

After the worse-than-expected US unemployment data investors feared that the world’s largest economy may go into a recession, which hammered US and global stock markets.

Although analysts saw the big sell-off of equities last Monday as only a healthy correction, investors remained nervous.

Fears that the US Federal Reserve will not implement a large interest rate cut in its Bank rate of at least 0.5% to counter any recession frights contributed to negative and volatile sentiment. Many felt that the Fed should hold an interim meeting to cut rates.

On Wall Street equity prices experienced their most volatile week for the year. The Dow Jones Industrial index traded down by 1000 points last Monday while the S&P 500 lost 3%, its worst day since 2022.

Concerns that the Federal Reserve was too late with rate cuts were the main culprits for the selling along with the unwinding of a popular currency trade by hedge funds.

Most economists surveyed by Bloomberg last week had indicated that they expect only a 0.25% cut in September. It was also clear that the heavy sell-off of the previous Friday and last Monday were just an over-reaction and markets started to stabilise again at the end of last week.

In Japan, the Nikkei 225 Index jumped more than 10% last Wednesday and ended the week only -0.64% lower.

In the US, the losses of last Monday were also recovered by Friday. On Wall Street the Dow Jones Industrial index ended the week 0.6% down, the S&P500 was flat losing only 0.04% and the Nasdaq also losing a mere -0.18%.

On South African financial markets, the JSE All Share index contracted by 3.0%, or 2 438 points, between Thursday, August 1 and Tuesday, August 6. The index then improved strongly last Wednesday and Thursday to end the week 210 points, or 0.2% higher.

Industrials remained strong as the Ind25 index jumped by 1.6% over the past four days of trading, while the Resource 10 index lost 4% over the past seven trading days. The gold price recovered sharply last week. Gold bullion reached its third highest level of $2 431 (R45548) on Friday.

On the foreign exchange market, the rand also remained strong and stable. Against the US dollar the currency traded at R18.29 on Friday, after it was sold off the previous Monday to R18.53 to the dollar.

The rand traded over the past three months in a narrow band of between R18.00 and R18/60 to the dollar. It is still expected that once the Fed and the SA Reserve Bank’s Monetary Policy Committee lower their bank and repo rates, the rand is likely to appreciate to levels of around R17.40 against the dollar by the end of the year.

This coming week domestic markets will be influenced by the release of South Africa’s unemployment rate for the second quarter by Statistics South Africa this coming Tuesday.

The jobless rate increased during the first quarter to 32.9%. It is expected that the unemployment rate will come down marginally to 32.7% over the last quarter and should be welcomed by financial markets.

StatsSA will also announce the June data on South Africa’s mining production on Tuesday and the retail sales numbers on Wednesday. Both will give some indication of the direction that the economy is moving in.

Movements on global markets this week will be dominated by the release of the US inflation rate on Wednesday. It is expected that core inflation came down in July to 3.2% from 3.3% in June and the main inflation rate to have declined to 2.9% against the 3.0% in June.

These figures should indicate that the Fed will lower its bank rate next month. The US will also publish its retail sales data for July on Thursday. It is expected that the sales at the retailers would increase by 0.3% against almost no growth in June. This in turn will show that the US economy is not moving into recession territory.

Elsewhere Great Britain (GB) will announce its inflation rate on Wednesday and GB and Japan will release their economic growth rates for quarter two on Thursday and China its latest retail sales figures.

Chris Harmse is the consulting economist of Sequoia Capital Management and a senior lecturer at Stadio Higher Education.

BUSINESS REPORT