Domestic financial markets suffer two-day rout
By Dr Chris Harmse
South African financial markets experienced a big downward movement since last Wednesday.
Share prices, bond rates and the rand had one of their worst two days of trade last Thursday and Friday.
Although one could argue that in reaction to the high unemployment number of 32.5 percent during the fourth quarter of 2020 and that the national budget gave low growth expectations over the next three years, financial markets would have suffered. This was not the case.
The reaction to the budget on the local front and globally was quite positive as the rand had appreciated strongly to levels around R14.40 to the dollar during and after the budget speech.
On Thursday and Friday the JSE lost more than 3 percent while the rand broke back through the R15 level to the dollar, and was trading at R15.02 on Friday afternoon. This was the biggest decline out of 27 emerging market currencies.
The rand lost 2.6 percent against the dollar over the week.
Against the pound, the currency depreciated by 37 cents to on R20.95 and against the euro it moved weaker for the week by 43c and traded on R118.23.
Bond rates on the JSE increased by 3.8 percent over the week, in reaction the South Africa’s soaring national debt and global inflation fears.
The big sell-off in markets locally can by summarised in one word: inflation.
Expected increases on economic growth post-Covid-19 rates saw bond yields surging as investors feared hikes in interest rates in the US amid an inflation spike.
On Wall Street, the S&P 500 was down by 2 percent on Thursday and opened 0.3 percent lower on Friday.
The US 10-year treasury yield increased sharply to above 1.5 percent, as inflation fears led to panic on the bond and equity markets. Tech stocks were sold off heavily as the Nasdaq lost more than 5 percent over the week.
Emerging market bonds and equities were hit the hardest as they braced themselves for capital flight as a downward correction in bonds, currencies and shares becames more imminent.
The JSE had a mixed and nervous week as most indices ended the week in the red. The all share index lost 2 percent to 66 138 points after its record level of 67 465 at the close the previous Friday.
The industrial index was hit hard as it tumbled 4.4 percent on the previous Friday’s close. The decline in commodity prices and fears of global interest rate hikes had a big impact on resources on Friday, after a strong first three days last week. The resources 10 index ended the week up by only 0.6 percent.
The gold price lost $43 (2.4 percent) to about $1 739 and platinum contracted by $112 (8.6 percent) over the week to $1 187.
The weaker rand continued to put pressure on the financial board as the Fin 15 index traded down by yet another 1.4 percent to 12 200 points.
Listed property surprised last week with a 1.8 percent gain.
This week all eyes will be on the release of South Africa’s total new vehicle sales today. ABSA will announce its manufacturing purchasing managers index (PMI) tomorrow. The IMS Markit PMI for February will be published on Wednesday.
On the global front, attention will be on the US job data (non-farm payrolls) for February that will be released on Wednesday, Thursday and Friday. The unemployment rate, jobless claims and labour participation rate will be the most important data.
Canada and Australia will announce their gross domestic growth rate for the fourth quarter of 2020. Most developing countries will also release their latest PMI indices and retail sales data. Germany will publish its latest unemployment numbers.
Dr Chris Harmse is the Economist of CHEconomics