GLOBAL and domestic financial markets continued their nervous volatile movements last week, as the Russia-Ukraine conflict continues, US inflation remains a threat for interest rates and the Covid-19 lock down in China put resource prices under pressure.
The Ukraine-Russia conflict keeps the oil prices (Brent) above $111 (R1 750) per barrel, fuelling cost-push inflation, especially in the developed world. The US inflation rate for April 2022 came in on 8.3 percent, against market expectations of 6.1 percent. The figure immediately put share prices around the globe under renewed pressure, as further hawkish interest rate hikes by the US Federal Reserve now loom.
In the US, equities took yet another week of hammering. The Dow Jones Industrial shares lost another 2.14 percent last week, and the index is now down by 11.4 percent since the beginning of the year. The S&P 500 was sold-off by 2.4 percent last week, losing 15.7 percent for the year-to-day. The tech weighted Nasdaq continues its free fall as the index decreased by another 2.8 percent last week, and already has plummeted by 23.1 percent since December 31. This nervousness and large correction in share prices are present in most developed markets.
On the JSE, equities performed once again better than in most developed and emerging markets. Although quite volatile over last week, with big losses last Tuesday to Thursday, equity prices recovered strongly on Friday, except for resources. The All Share index had recovered by 1 percent over the week, after its biggest loss this year of more than 6 percent the previous week.
The index, however, remains 6.8 percent down for the year. Industrial shares also performed well last week as the Ind25 index increased by 3.26 percent, while financials also gained 2.73 percent since the previous Friday. The Fin15 index is now 6.3 percent higher than the beginning of the year.
The strong decrease in the gold price by $74 per ounce and platinum by $34 per ounce – together with the shocking figure released by Stats SA that mining production in South Africa plunged by 9.3 percent year-on-year in March of 2022, the biggest decline in mining activity since June of 2020 – pushed the resources share prices down for the second consecutive week. The Res10 index lost 2.8% and thereby wiped out any gain for the year-to-date as the index is now -0.3 percent in the red since December 31.
Despite the negative effect of stagflation (low growth and high inflation) on currencies across the world, the rand exchange rate remains stable. Although the currency did depreciate strongly against the US dollar over the past month, it stays relatively on the same level as the beginning of the year, when the dollar traded at R15.95.
On Friday evening, the rand stood on R16.16 against the dollar. Against the pound, the rand lost 11 cents last week to close on R19.83. This is still 212c stronger (8.1 percent) than the opening level of R21.59 on December 31, 2021. Against the euro the rand continue to appreciate as it gained another 6c to R16.63 last week. The currency is now 132c stronger than the R18.15 level (7.3 percent) than the value on January 1 this year.
This coming week investors and analysts will turn their attention to the meeting of the Monetary Policy Committee (MPC) of the South African Reserve Bank.
The release of South Africa’s inflation rate figures for April, as well as retail sales for March by Stats SA on Wednesday, will draw attention. It is expected that the inflation rate will bridge the 6 percent level at 6.2 percent, while retail sales are expected to lose another 0.5 percent (year-on-year).
An inflation rate of higher than 6 percent will be higher than the Reserve Bank’s upper limit of 6 percent and will increase the chances of yet another hike in the repo rate, that can be announced by the MPC on Thursday.
On global markets everybody awaits the release of various inflation numbers by European countries, such as the UK, the EU, Germany and France. Other countries, such as Japan and Canada, will also publish their CPI data. In the US, housing figures and oil and gas stock will test market sentiment.
Dr Chris Harmse is the economist at CH Economics(Pty) Ltd and a lecturer at the School of Commerce at Stadio Multiversity.