South African markets and the rand yesterday quickly shrugged off last week’s impressive economic growth to pre-pandemic levels as global markets tumbled, weighed down by concerns about a looming recession amid a tightening monetary policy environment.
Stocks on the JSE opened the week at an eight-month low, with the All Share Index more than 2 percent lower around the 66 000 level point, the lowest since October last year.
The all share index closed 2.1 percent lower at 66 381.03 points.
Commodity-linked stocks were tracking a global sell-off as fears of recession gripped the domestic market after trade slipped into bear market territory.
The higher-than-expected US inflation of 8.6 percent for May has hardened bets of aggressive monetary tightening from the Federal Reserve.
Anchor Capital co-investment officer Nolan Wapenaar said the market was factoring the robust US inflation numbers into its expectations for the Fed meeting later this week.
Wapenaar said the above expectation inflation numbers had the market speculating on whether the Fed might hike by 0.75 percent this month, instead of the expected 0.50 percent.
“It is becoming increasingly questionable that the Fed can tame inflation without causing a recession,” Wapenaar said
“We are seeing significant risk aversion as the risk of a recession increases in the face of the Fed hiking higher than we were anticipating.
“This risk aversion is spreading across all asset classes and resulting in weaker financial markets.”
Meanwhile, the rand also weakened to a one-month low, breaching the R16 to the US dollar mark amid general risk-off sentiment dominating the markets.
By 5pm the rand was trading at R16.13, 28c weaker against the dollar from the same time the prior day.
A year ago the rand was trading at R13.78 to the greenback.
The rand yesterday moved from R15.85 to the dollar close on Friday to weaken to R16.9/$ as the markets positioned for higher rates hikes in the US while investors were spooked by China reimposing some Covid-19 restrictions due to new infections in Beijing.
Beijing's most populous district, Chaoyang, announced three rounds of mass testing to quell a “ferocious” Covid-19 outbreak that emerged last week.
A combination of the weakening rand, the risk of higher global inflation, and aggressive monetary policy in the US have strengthened views that the SA Reserve Bank will hike interest rates by another 50 basis points in its July meeting.
Investec chief economist Annabel Bishop said the Fed’s tone at its meeting was likely to remain significantly hawkish, which would place further pressure on the rand this week.
Bishop said markets were recalibrating expectations, elevating risk aversion, driving rand depreciation.
“A further 50 basis points hike from the US in July will erode the differential between South Africa and US interest rates established and the rand will be subject to further depreciation pressures as a result,” Bishop said.
“For the rand, domestic good news is quickly discounted, as the focus remains on the international environment.
“The lower inflation rate in South Africa than many of its key trading partners is providing some support to the rand, although it is mainly being buffeted by risk aversion.”