Global markets yesterday caught a serious bug as China “coughed”, causing serious volatility across all asset classes and currencies in emerging markets.
South African markets remained muted yesterday, with risk appetite coming under pressure as the protests in China against the government’s zero-Covid policy rattled the markets.
The rand traded slightly lower, closing on the JSE at R17.12 to the US dollar, after weakening to R17.19 as growing unrest in China dented risk sentiment, while further losses were limited by a softer greenback amid prospects of slower rate hikes by the Federal Reserve soon.
However, the rand has gained over this quarter against the US dollar, pulling back to R16.91/$1 after the release of the minutes of the US monetary policy meeting earlier this month, evidencing wide support for slowing the pace of US rate hikes.
The rand’s strength in response to the Fed minutes aided the SA Reserve Bank in deciding on a 75 basis points hike instead of a 100 basis points on Thursday, as did concerns over global and domestic economic growth, with assumptions of lower oil prices, although food price forecasts have risen.
Investec chief economist Annabel Bishop yesterday noted that the recent rand weakening came as risk aversion rose in global financial markets, in what is still a volatile and uncertain environment.
“Global financial markets have been affected in particular by the protests in China due to its extreme lockdown restrictions, with the rand depreciating overnight as it was impacted by weakened Asian bourses,” Bishop said.
“China has done a U-turn on its restrictions, which were easing earlier in November, when it reduced Covid test requirements and also lowered isolation periods for those infected, which caused some improvement in risk sentiment in markets, and so the rand, over November.
“In this environment, with President Xi (Jinping) not expected to back down on his stance currently, the economic outlook has become unclear, with the rand reaching R17.19/$1 today. Persistence of a harsh zero-Covid policy in China would negatively affect emerging markets into 2023.”
Investors are now closely watching what the Chinese government’s response to the protests will be as the Chinese yuan also fell to a three-week low as investors sought safe-haven assets.
Brent crude oil prices also fell by more than 1.1% to $82.67 (R1429) per barrel yesterday, adding to a losing streak initiated earlier in the month, as market expectations continued to shift towards a scenario of lower future demand.
The markets have already experienced elevated volatility this year due to the ongoing war in Ukraine, China’s economic slowdown, ongoing supply chain issues and co-ordinated monetary policy tightening globally.
Ricardo Evangelista, a senior analyst at ActivTrades, said China’s upheaval had a lot to do with the current risk aversion in emerging markets currencies.
“The main driver behind this bearish sentiment is the situation in China, where the zero-Covid policy is reducing economic activity in large parts of the country.
“Without an end in sight for Beijing’s stringent virus-control policies, rarely-seen popular protests started appearing in several cities, adding to the negative outlook for the Chinese economy.”
Meanwhile, the JSE All Share Index also remained muted after a slight 0.3% gain to 73 368 points, buoyed by gains in AB InBev, RCL Foods, Richemont and Prosus stocks.
Old Mutual Wealth Investment Strategist Izak Odendaal said South African equities were not only trading at a big discount to global markets, but also at low levels compared to recent history.
“In fact, the JSE already trades at levels usually seen during recessions,” Odendaal said.
“South African bonds continue to discount a lot of bad news too, despite the fact that the country’s fiscal condition is gradually improving as confirmed by S&P Global’s recent ratings decision.”