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Escalating Middle East tensions, hawkish Fed drives emerging markets lower

A picture taken from the Israeli side of the border with the Gaza Strip shows smoke rising behind destroyed buildings in the norther-western part of the Palestinian enclave during an Israeli bombing on October 21, 2023, Photo: AFP

A picture taken from the Israeli side of the border with the Gaza Strip shows smoke rising behind destroyed buildings in the norther-western part of the Palestinian enclave during an Israeli bombing on October 21, 2023, Photo: AFP

Published Oct 23, 2023

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Stocks on the JSE fell for the fourth day in a row on Friday, following an emerging markets retreat due to global risk-off sentiment, Middle East tensions and interest rate uncertainty.

The JSE All Share Index ended Friday 1.1% lower to 70 198 points, its lowest level in 11 months since November 9, in line with major global peers

Among individual stocks, the worst performer was Lighthouse Properties which fell 6.5%, followed by Sun International at 5.5%, Anglo American at 4.3%, and Bytes which eased by 4.1%.

However, shares of food producer and consumer goods company Tiger Brands surged by more than 11% after it said CEO Noel Doyle would step down and would be replaced by Tjaart Kruger from November.

For the week, the JSE lost about 3.7%, its worst weekly performance since mid-August.

Analysts on Friday said the escalating Middle East tensions and the hawkish stance of the US Federal Reserve (Fed) had driven a risk-off sentiment and put emerging markets on edge.

Anchor Capital’s investment analyst Casey Delport said the longer the conflict in Palestine lasts, the more likely it was that other key countries in the Middle East, such as Iran or Saudi Arabia, might be drawn into it, either directly or indirectly.

As such, Delport said the current concern revolved around the timeline for resolving the conflict.

“If it were to escalate further, we anticipate that the strain on oil markets would significantly escalate, potentially leading to even more pronounced market disruptions,” Delport said.

Fed chair Jerome Powell said it was likely that they would keep rates unchanged for now, given the rise in the bond yields, but left the door open for another hike later, dependent on data and international developments.

Delport said this scenario may then translate into an actual increase in the Fed funds rates, which, in turn, could bolster the US dollar.

“Consequently, the prospect of a US recession becomes more plausible than current market pricing suggests,” she said.

“For the rest of the world, particularly for oil-importing nations like South Africa, elevated oil prices translate to increased fuel costs and inflationary pressures.

“This, in turn, compels monetary policy to tighten further and to remain at elevated levels for a more extended duration than is presently anticipated.”

Current market sentiment towards South African government bonds is especially negative given the deteriorating fiscal outlook.

The country’s precarious fiscal situation has again come under the spotlight, with the Medium Term Budget Policy Statement (MTBPS) looming on 1 November.

The latest estimates point to this year’s revenue shortfall amounting to around R50-R60 billion, with further spending pressures on the horizon as the politicking begins in earnest ahead of the 2024 national elections.

Morningstar South Africa head of investment Sean Neethling said both local and foreign investors were becoming increasingly concerned about the debt hangover effects and higher borrowing costs arising from continued fiscal slippage on an already bloated balance sheet.

“Market participants will be looking for an explicit commitment to cost containment measures to control a public sector wage bill that continues to be funded from increasingly expensive debt without the requisite productivity gains,” Neethling said.

“In an especially uncertain environment, the government will be under increased pressure to improve transparency and present a credible strategy to address both short and longer-term challenges to the country’s balance sheet.

“Navigating the uncertainties of both domestic and global capital markets requires a disciplined investment and risk management process in the current environment. While investors are being adequately compensated for the fundamental risks to SA government bonds, exposure needs to be managed through sensible asset allocation and portfolio diversification.”

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