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Sell-off of equities continues: interest rate hikes fuel fear for risky assets

THE Federal Reserve building in Washington. The aggressive interest rate increase scenario stance by the US Federal Reserve has brought about fear of a repetition of 2009, when the sharp increase in the US bank rate triggered the sub-prime crisis that had led to the worldwide recessions, says the author. Picture: Reuters.

THE Federal Reserve building in Washington. The aggressive interest rate increase scenario stance by the US Federal Reserve has brought about fear of a repetition of 2009, when the sharp increase in the US bank rate triggered the sub-prime crisis that had led to the worldwide recessions, says the author. Picture: Reuters.

Published May 9, 2022

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Chris Harmse

GLOBAL and domestic financial markets unfortunately started to increase their volatility and uncertainty on the back of more evidence of stagflation across the world.

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The ongoing negative impact of the Russian-Ukraine war, as well as renewed rounds of Covid-19 variant infections contribute mostly to negative economic prospects for the next two years.

The aggressive interest rate increase scenario stance by the US Federal Reserve at their last two meetings in April and May brought about fear of a repetition of 2009, when the sharp increase in the US bank rate triggered the sub-prime crisis that had led to the worldwide recessions.

Many studies concluded that the increase in oil prices from $40.71 (R642) per barrel in December 2004 to $144.96 in July 2008 had made a “material contribution” to the subsequent US inflation fears, higher interest rates and therefore the financial crisis and world recession. These fears now seem to start to repeat themselves as risky assets like equities experience quite a sell-off last week. The US inflation rate had doubled from 4.2 percent in April 2021 to 8.5 percent in April 2022.

On Wall Street the three main indices continue their downward movement (correction). The Dow Jones industrial index closed Friday down by 0.3 percent, losing -5.5 percent since the beginning of April and is already 9.5 percent lower for the year to date. The Nasdaq also continue its downward trend and traded Friday 15.6 percent lower for the month and already had lost 21.27 percent for the year-to-date. The main index on the Wall Street board the S&P 500, is down by 9.3 percent since the beginning of April and now trades -13.4 percent since the beginning of the year.

On the JSE, follows the same pattern as share prices contracted considerably over the last two weeks and last month. The all share index lost 6.2 percent alone last week, traded down by 10.1 percent over the last month and is now 7.7 percent down since the beginning of the year. The same tendency occurs for most other indices on the JSE. The Industrial 25 index was down by 9.2 percent since the beginning of April and lost 21.8 percent for the year-to-date. The resources sector experienced a bumper upward rally during the first quarter of 2022 as the Resources 10 index gained 16 percent, just to lose again 11.5 percent over the last month and 7 percent alone last week. The index is now only 2.6 percent higher for the year to date.

The same tendency occurred among financial shares. The Fin15 index sold-off by 6.9 percent last week, losing 13.6 percent over the past month, although the index remains positive for the year at a gain of 3.5 percent.

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The rand exchange rate managed to keep its value constant since the beginning of the year against all three main currencies. Although the rand lost 140 cents, or 9 percent, since the beginning of April, when the currency was still trading at R14.57, to R15.97 to the dollar on Friday, it remains level with its value of R15.95 of December 31, 2021. The same tendency appears with the pound.

The rand lost 50c from R19.22 to R19.72 against the sterling over the past month but is still 187c stronger than the R21.59 at the beginning of the year. Against the euro the rand depreciated by 80 cents since 1 April to R16.83 on Friday, but is still 196c stronger than the R18.15 at the beginning of the year.

The further worrying aspect that equity markets face is that the Absa Purchasing Managers’ Index (PMI) fell sharply to 50.7 index points in April, against the 60 points in March. An index value bigger than 50 points towards expansion in the manufacturing sector and lower than 50 to a contraction. This value is lowest since the KwaZulu-Natal (KZN) looting in July last year. Lower business activity and weaker new sales orders drove the index down considering the KZN floods that had led to serious infrastructure damages.

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This coming week on Thursday, Statistics South Africa will release the March mining and manufacturing production figures. On global markets everybody awaits the release of the US inflation rate for April that will be announced on Wednesday.

Analysts expect that the US inflation rate contracted to 8.2 percent against the 8.5 percent in March. If they got it wrong and the inflation rate is higher, one can expect further turmoil of global markets. The US producer price index (PPI) will be released on Thursday. US natural oil and gas stocks changes that will be released on Thursday will also draw attention. European industrial production will be released on Friday.

Dr Harmse is the economist at CH Economics and lecturer at the School of Commerce at Stadio Multiversity.

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