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World markets take strain as EU debt fears dominate

Financial markets suffered steep losses yesterday after a resurgence of sovereign debt dangers in the euro region and a growth warning from China. As risk aversion rose, the rand weakened sharply from R8.27 to the dollar at Friday’s close to R8.4488 by 5pm. And the JSE all share index fell 1.2 percent to close at 33 814.83 points.

Other stock markets took bigger hits. The Sydney Morning Herald reported the Sydney all ordinaries index lost nearly 1.7 percent, Hong Kong’s Hang Seng index 3.1 percent, China’s CSI 300 1.3 percent and Japan’s Nikkei 225 1.9 percent.

a visitor watches stock price movements inside the Madrid stock exchange, or Bolsas y Mercados, in Madrid, Spain, on Monday , July 21, 2012. Photographer: Angel Navarrete/Bloomberg. Credit: Bloomberg

Europe followed. At the close Germany’s DAX was down 3.2 percent, Paris’s CAC40 lost 2.9 percent and London’s FTSE 100 gave up 2.1 percent. In the US, the Dow Jones industrial average tumbled 1.8 percent within 21 minutes of the open.

Oil prices fell, with the benchmark Brent crude oil at an intraday low of $102.40 a barrel in the early afternoon from a $106.80 close on Friday. It recovered to $103.55 by 5pm.

The broad asset sell-off came after a Chinese central bank adviser said the country’s expansion may cool to 7.4 percent this quarter, said Bloomberg, below the government’s official target of 7.5 percent for the year. China has been a major growth driver since the global recovery that started in 2009/10. The latest figure reflects falling Chinese exports following a contraction in the euro zone, one of China’s major trading partners.

The SA Reserve Bank’s 2012 annual report, released yesterday, noted that European countries in recession included Italy, the Netherlands, Portugal, Ireland, Greece, Slovenia, Cyprus and Spain.

Along with concern over China’s slowdown, fears about the stability of the euro region mounted. Yields on Spain’s 10-year bonds – at a 20-year high on Friday, according to Moody’s Analytics – rose further, pushing the cost of debt to unacceptable levels. The market took this as a sign that Spain would need a sovereign bailout, despite having been granted a E100 billion (R1 trillion) loan for its troubled banks.

In addition, there were reports that Greece, which has to repay E3.9bn in debt next month, would not continue to receive funding. But the International Monetary Fund responded by saying it would support Greece in overcoming its economic difficulties. Talks between the IMF and Greece are due to start today.

Safe haven instruments thrived yesterday. Bloomberg reported that government bond yields in the US, the UK and Germany fell to record lows, a signs that money was pouring into these investments.

The instability reflected the deteriorating global growth outlook – to which South Africa is not immune. Economic growth this year is likely to miss the government’s current forecast of 2.7 percent, Reuters reported yesterday, quoting Finance Minister Pravin Gordhan. The comment came only days after the Reserve Bank cut its full-year forecast from 2.9 percent to 2.7 percent.

After a 50 basis point cut in the Reserve Bank’s repo rate last week, the domestic market believes more cuts may come.

Absa Capital said forward rate agreements were seeing a 60 percent chance of another 50 basis point cut in four months and a 77 percent chance within six months.

“Given the exceptionally dovish nature of the recent monetary policy statement, the moderating inflation cycle and the lingering downside risk to the global economy, we believe the bank is likely to cut rates by another 50 basis points at its September policy meeting.”

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