JOHANNESBURG - In what is almost a repetition of May last year, the geopolitical risk surrounding the trade war between the US and China imposes worrying risks for financial markets, despite the Covid-19 pandemic woes.
China’s decision on Thursday to introduce a new national security law to deal with pro-democracy protests in Hong Kong created new fears that the US-China trade negotiations and deals of the past three years might collapse.
Hong Kong as a manufacturing hub in Asia might now subside as an economic power. In reaction global equity markets, especially emerging market bourses, contracted, bond rates climbed and the dollar strengthened.
Domestically the JSE felt the China-Hong Kong-US uncertainty with the all share index losing more than 2000 points alone last Thursday and Friday, after trading above the 52100 (52143) point level during the middle of last week, or 5.1percent higher than the close of 49628points the previous Friday. The index ended Friday on 50147points or an increase of a mere 1percent for the week.
The decision by the Monetary Policy Committee (MPC) last Thursday to lower the repo rate with 0.5percent, the fourth consecutive time this year, came as expected. The MPC stressed that overall risks for the inflation rate appear to be on the downside, given the stronger rand, lower international oil prices and lower bond rates. The Reserve Bank now expects that the inflation rate will reach a low of 3.4percent for 2020 and 4.4percent in 2021 and 2022. In this regard it is forecast by the Reserve Bank’s Quarterly Projection Model a further two more cuts of 25 basis points in the repo rate during the next two quarters.
The MPC stressed its worry on the expected economic growth rate for South Africa in 2020 due to the Covid-19 virus and foresee a negative growth rate of 7percent in 2020, but expects the economy to rebound strongly to growth rates of 3.8percent in 2021 and 2.9percent in 2022. The MPC also mentioned that: “Monetary policy can ease financial conditions and improve the resilience of households and firms to the economic implications of Covid-19.” In this regard the bank has introduced lower regulatory requirements on banks and steps to secure liquidity in domestic markets.
The rand exchange rate started to discount this continuation of sound monetary policy already last Monday.
The currency traded as weak as R18.55 to the dollar at the close the previous Friday, but quickly tested the R18 level last Tuesday. After the announcement of the cut in the repo rate on Thursday, the rand appreciated strongly to levels of around R17.56.
The uncertainty on the US-China-Hong Kong debacle on Friday had seen the rand lose ground again to a level of close to R17.90, but recovered in late trade again to R17.70, still 83 cents stronger than the previous week.
The gold price remains strong on $1732 (R30481), but the price of Brent crude subsided to $33.67 per barrel. On the capital market bonds continue to recover. The R186 Government Treasury ended the week on 7.65percent against 7.80percent the previous Friday close.
This coming week, investors’ attention will concentrate on the release of South Africa’s inflation number for April. Markets expected a rate of 4percent, marginally lower than the 4.1percent recorded in March 2020.
Dr Chris Harmse: Economist and chief investment officer Rebalance Fund Managers.