Market report: Fed brings surge in stock prices to 'temporary' halt
JOHANNESBURG - After one of the best recoveries the previous week, market sentiment turned nervous last week.
The sudden turnaround in Covid-19 infections in the US, as the number of infections passed 2 million, as well as comments by US Federal Reserve chairperson Jerome Powell, brought the strong surge in stock prices last Wednesday to an end.
Powell said the Fed will not consider using negative interest rates to stimulate the economy further, a comment that was not welcomed by US President Donald Trump.
The movement towards negative interest rates could boost consumer spending and a much faster recovery in the world's biggest economy.
Analysts believe that central banks in Asia and Europe could contribute much towards regenerating demand and economic growth by using negative interest rates.
The Fed believes that by continuing to buy back US bonds at a rate of $80 billion (R1.62 trillion) a month and $40bn in mortgage-backed securities, it can contribute much to expected gross domestic product growth of 5 percent in 2021. This would prevent inflation from taking off too fast and, in turn, mean it could abstain from hiking rates again too soon.
In reaction to the Fed’s stance, US equities had one of their biggest daily sell-offs in 12 weeks on Thursday, as most indices pulled back by more than 6 percent. The Dow Jones Industrial index traded down more than 2 200 points, or 8.9 percent, on Wednesday and Thursday.
US equities rebounded quickly on Friday, led by prospects for the opening of airlines and ship cruise operators. Shortly after the opening, the Dow had recovered by 1.3 percent.
JP Morgan remarked on Friday that “Thursday’s slump in equities was a pause rather than a reversal of a trend”.
In South Africa, shares moved sideways, as resources, rand hedgers and financials recovered quickly on Friday.
Financials and banking shares, in particular, did not take advantage of the stronger rand during the first part of last week.
The Fin 15 Index was down 7 percent, and banks were down 8.8 percent from Monday to Thursday last week.
The FTSE/JSE All Share Index moved sideways during the week, trading 1.9 percent lower after the strong bullish movement of 8.4 percent the previous week.
The Industrial 25 Index was down 1.2 percent, the Resources 10 Index was 1.2 percent weaker, and listed property lost 3.2 percent.
At one stage last week, the rand reached its strongest level since Moody’s downgrading to junk as it traded below R16.50 to the dollar in intra-day trade on Wednesday.
Since then, with uncertainties over developed economies’ recovery and a possible rebound in Covid-19 cases, the rand moved weaker, and on Friday afternoon traded at R17.10 to the dollar, almost 50 cents weaker, than in the middle of the week.
This coming week, investors’ attention will be on the release of the latest SA Chamber of Commerce and Industry's business confidence index. It is expected the index has
improved from 77.8 points in April to 83 points last month.
Globally, all eyes will be on US retail sales and manufacturing production numbers tomorrow, housing data on Wednesday and jobless claims data next Thursday.
Several countries will publish their economic growth rates (UK, Australia and Russia) for the first quarter. Most developed-market economies will release their latest retail sales, inflation rates, unemployment data and manufacturing production data. In the UK, the Bank of England will announce its interest rate decision on Thursday.
Given the much higher movement in the prices of petrol and diesel, due to the sharp increase in oil prices, the under-recovery in the price of 95 octane petrol is R1.61 and diesel R1.47. If the exchange rate remains under pressure, consumers can expect to pay much more for fuel next month.
Dr Chris Harmse is an economist and chief investment officer at Rebalance Fund Managers.