SOUTH African equity markets and the rand rebounded sharply last week in line with global trends that turned around after the big sell-off during the last three weeks.
The S&P500 index on Wall Street halted its longest rally of weekly losses since 2001. The strong movement in world markets to almost over-sold positions was caused by mixed economic and corporate data.
The US economy contracted by -1.5% (quarter on quarter, annualised and seasonally adjusted) during quarter one of this year. The sharp increase in energy prices, even before the Russia-Ukraine conflict, the ending of monetary stimulus, and the sharp rise in US inflation caused the expected turnaround in economic activity.
The Russia-Ukraine war had deepened the sudden economic woes as the biggest contribution to the sharp drop in growth coming from trade.
The Fed had to react to the more than doubling in US inflation to 8.5% by the end of quarter one by increasing its bank rate by 0.75% over the past two meetings. These events saw US equities losing almost 20% of their value since the beginning of the year.
This much weaker growth performance, a slump in home sales, and weaker retail sales in contrast sparked interest in equities last week as investors started to believe that interest rates may not increase much more for the rest of the year.
This turnaround in sentiment, as well as the surging revenues of companies like Apple, Tesla and Dell Technologies, with reported revenue growth exceeding market expectations, kick-started the rebound in share prices since last Wednesday.
The Dow Jones Industrial Index ended the week 6.2% higher, whereas the S&P500 index rebounded by 6.6%, while the Nasdaq recovered 6.8% of its big losses since the beginning of the year. However, analysts remain cautious about whether it is time to get back into shares.
Despite the warning by the governor of the Reserve Bank, Lesetja Kganyago, that the monetary policy committee is likely to increase its repo rate further during the rest of the year, equities on the JSE last week followed the sudden and strong rebound of the rest of the world.
The All-Share and the IND25 indices had risen by 4.3% over the week. Financial stock continues its bull run, suggesting that local equities remain favourable. The Fin15 index increased by 3.3% and is now 9.8% up for the year.
Following the sharp increase in oil prices, the increase in resource prices led the turnaround in resource stock prices. The Res10 index recovered by 6.1% last week and trades again in positive territory for the year.
The rand also remains bullish, especially against the US dollar and pound sterling. The currency gained another 30 cents against the greenback last week, trading at R15.56 against the dollar on Friday, and moved 16 cents stronger against the pound to R19.65. This represents a 9% appreciation against the pound since the beginning of the year.
This coming week, investors and analysts will turn their attention to the unemployment rate for quarter one to be published by StatsSA this coming Tuesday. It is expected that the devastating rate of 35.3% during the final quarter of 2021 will have increased even further to 35.7%, the highest rate ever. The Department of Customs and Excise will release the balance of trade for April also on Tuesday. On Wednesday, South Africa’s new motor vehicle sales for May will be published.
In global markets, everyone awaits the release of the US non-farm payrolls for May. The unemployment rate and new jobs created will give direction to equity markets. The US will also announce various purchasing managers’ indices for May this coming week. Various other developed market economies – such as Australia, Canada and France – will release their gross domestic product economic growth rates for quarter one. The unemployment rates for a few developed market economies this week will also be of interest – most notably, the EU, Italy, Germany and Japan.
Chris Harmse is an economist at CH Economics and a lecturer at the School of Commerce at Stadio Multiversity.