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Turning point for struggling financial markets?

US Federal Reserve Board Chairman Jerome Powell speaks during a news conference after a Federal Open Market Committee meeting at the Federal Reserve in Washington, DC, on November 1, 2023. Photo: AFP

US Federal Reserve Board Chairman Jerome Powell speaks during a news conference after a Federal Open Market Committee meeting at the Federal Reserve in Washington, DC, on November 1, 2023. Photo: AFP

Published Nov 6, 2023


DESPITE a week of drama on the political and economic front in South Africa, financial markets improved sharply since last Wednesday.

The US Federal Reserve’s Federal Open Market Committee meeting on its decision on interest rates last Tuesday and Wednesday as well as the US Non-Farm Payrolls report on Friday seem to have led to a remarkable change in sentiment towards risky assets globally.

This sentiment overshadowed the worrying aspects of the Minister of Finances’ Medium-Term Budget Policy Statement (MTBPS) that was delivered on Wednesday. The minister pictured a somewhat negative picture on the state’s financial position, with the budget deficit expected to have increased by R54.7 billion compared with the February 2023 Budget estimates.

This will lead to a total deficit of almost 5.0% of gross domestic product (GDP) and much higher than the 4.1% budgeted for in February. Lower revenue from especially the primary sectors (mining and agriculture), higher wage bill costs and higher projected debt-service costs, now 22.0% of total expenditure, all contribute to total debt rising to 77.0% of GDP, against 72% that was budgeted for in February.

Despite this gloomy picture on the state’s finance, the press conference of the US Federal Reserve on Wednesday evening seems to have turned global and domestic market sentiment to the better. This illustrates once again that South African financial markets namely the equity, foreign exchange and bond markets are rather a function of global events.

In reaction on the decision by the Fed to keep its bank rate unchanged on between 5.25% and 5.50%, investors, market analysts, and economist judged the Fed’s sentiment rather dovish, and anticipated that the end of the current interest rate cycle is reached, and that the next movement will rather be a cut, after expected a few unchanged rate meetings over the next four to six months.

The net farm payrolls report for October released on Friday confirmed the softer tone of the Fed. For the first time in six months the US economy created less jobs, 150 000, than was expected (160 000). The unemployment rate advanced to 3.9%, up from 3.7% in September. The market was pricing in 79 bps in Fed cuts next year already ahead of the report.

In reaction, the US dollar depreciated strongly against most currencies, and investors aggressively started to buy bonds and shares. On the JSE, the all share index gained 4.5% alone last Thursday and Friday, ending the week 1.6% higher. Financial shares (FIN15) shot up by 4.5% over the past seven days, the industrial board was 2.4% higher, but the resources 10 index lost 1.9% over the week, despite a strong recovery of more than 3.0% last Wednesday and Thursday.

Despite the negative picture of the government’s finances, the rand exchange rate rather followed other emerging market currencies and appreciated strongly against the US dollar, the Euro and the Pound. Over the past seven trading days, the rand has strengthened by 71 cents, or 3.5%, against the dollar to trade Friday evening at R18.25. This is quickly moving towards the average of R17.60for the fourth quarter that most economist had forecast.

The price for Brent crude also moved much lower last week and traded at $85 (R1609) a barrel on Friday, almost $5 per barrel lower than the previous week. This is likely to lead to another sharp drop in fuel prices at the beginning of the holiday season in December. On the capital market bond rates decreased sharply as the R209 10-year security gained 1.4% over the last two days.

On Wall Street, equities recovered strongly last week. The Dow Jones Industrial shares improved by 5.07% last week, the strongest recovery over a week in 2023. The S&P500 index gained 5.85% and the Nasdaq shot up by 6.61%. The FTSE100 in the UK improved by 1.7$ over the week and in Europe the Euronext100 index traded 3.8% higher.

This coming week local markets will await the release of the mining and manufacturing production numbers for September on Thursday. On global markets, the speeches by the Fed chairperson Jerome Powell, and European Central Bank president Christine Lagarde will draw attention. The UK will announce its preliminary GDP growth data for quarter three on Thursday.

Chris Harmse is the consulting economist of Sequoia Capital Management.