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Markets on Monday: volatility continues with fears of US recession

Chris Harmse is the consulting economist of Sequoia Capital Management. Picture: File

Chris Harmse is the consulting economist of Sequoia Capital Management. Picture: File

Published May 2, 2023


Volatility on global and South African financial markets continued for the third consecutive week.

News emerged that the US economy had grown by an estimated 1.1% during the first quarter of this year, much lower than the 2.6% for the fourth quarter of last year. This number brought nervousness to global stock, bond and foreign exchange markets. Expected economic growth for the first quarter had been 2.0%.

Data on US inflation also indicates that inflationary pressures still exist that could force the US Federal Reserve to lift interest rates even further at their meeting that starts tomorrow. These two conflicting movements strengthened volatile US and global equity and exchange rate markets.

The lower economic growth rate indicates that the US economy may move into recession during the second part of the year. All categories of investment expenditure contracted by between 2.0% and 4.0% during the first quarter as the aggressive increase in interest rates by the Fed discouraged any new capital formation by businesses. At the same time, private consumption expenditure (PCE) continues to grow robustly by 3.7%. Together with the consistently low unemployment rate in the economy that pushes wages higher, inflation pressures remain.

Stagflation (negative growth with persistent elevated levels of inflation) in the US is a growing concern. This reality seems to have put emerging markets currencies on a stronger recovery path against the dollar. On Wall Street, the possibility that US interest rates may not be increased on Wednesday started to emerge on Friday, pushing equity prices higher. The S&P500 index ended the week 0.83% higher and recovered more than 2.0% since last Wednesday after higher-than-expected tech share earnings also boosted stock prices.

Domestically, the uncertainty of the ANC government on President Putin’s visit to South Africa at the Brics summit in Durban in August had put South African financial markets under greater stress and volatility.

The initial decision of the president to abandon South Africa’s membership of the International Criminal Court last Wednesday pushed the rand weaker by more than 35c against the greenback to R18.34 after markets were closed.

The decision was reversed on Thursday, but the harm already done pushed equity markets into the red on Thursday. The rand recovered only marginally on the news of the US’s increased PCE and closed on Friday flat on R18.29 to the dollar.

However, the lower-than-expected US growth data helped stocks on the JSE to recover again on Friday, as an emerging market and gold became a haven for investors. The all-share index moved flat during the first four days last week and gained only 0.3%.

The expectation that US interest rates may be increased on Wednesday boosted the gold price initially from $1 982 (R36 369) last Tuesday to the $2 000 level on Wednesday. Sentiment against the dollar returned on Thursday and Friday owing to recession expectations for the US economy. Gold lost steam on Friday to trade at $1 989 on Friday evening.

This coming week, investors and analysts will await the decision by the Fed on Wednesday on interest rates as well as the release of the US non-farm payrolls for April on Friday. These two indicators will dominate global shares prices, bond rates and exchange rates. Domestically, the publication of the April new vehicle sales on Tuesday is the only indicator of note, and South African financial markets will follow global sentiment reaction on the above US releases.

Other economic and market indicators of note for the week are the release of various manufacturing Purchasers Managers Indices (PMI) of developed economies during the week. The EU will publish its latest unemployment rate on Wednesday, and the ECB will announce its interest rate decision on Thursday.

Chris Harmse is the consulting economist of Sequoia Capital Management