Global equity markets last week had a terrible run. The minutes of the US Federal Reserve’s Federal Open Market Commission (FOMC) monetary policy meeting that was held on July 25-26 was released last Wednesday.
The minutes confirmed the hawkish mood of the FOMC and showed that the Fed has likely not finished raising interest rates. Equity markets in reaction are now seeming to start to discount that a US recession is imminent.
On the JSE equity markets did not only discount a possible hike in US interest rates next month, but also that the SA Reserve Bank’s Monetary Committee (MPC) will have no other choice to follow. The upside risk of the rand, which is already very weak, on further imported inflation will force the MPC to hike the repo rate by at least another 0.25% next month.
The all share index decreased last week with 4 669 points, or 6.0%. On Friday alone the index was down by 1.74%. The sharp fall wiped out almost all the gains for the year as the index is now only 1.82% higher for the year-to-date.
Even the strong industrial share index lost 4.7% last week. Resources took the biggest hiding last week as the RES120 index was shredded by 9.7%, bringing the year-to-date fall to 21.3%. It is unlikely that the resource sector will be able to provide the tax bonanza to the government again like they did the previous two years. This will put pressure on the government to increase taxes in an election year, as it will not scrap the R350 basic grant, nor have the room to borrow more. This will put consumers under a further strain coming February.
On the capital market the ALBI managed to increase by 1.0% last week, but the bond market is still 5.50% up for the year-to-date, indicating that investors still can beat the inflation rate in money and capital market instruments.
The rand exchange rate started to improve somewhat on Friday. Against the dollar, the currency in late trade on Friday dipped under the R19.00 against the dollar level and ended at R18.96 for the week as the currency against the US dollar moved sideways and ended on the same level as the previous Friday. Against the pound the rand depreciated by another 15 cents last week and ended Friday well above R24 at R24.16 to the pound, one of its lowest levels since the Covid-19 pandemic. Against the euro, the rand managed to move stronger last week by appreciated by 12 cents to R20.62.
Brent crude oil last week traded sideways with only $0.84 (R16) lower on R$83.71 to the dollar on Friday evening. According to the Central Energy Fund (CEF) by last Thursday, August 17, the petrol price was R154 cents/litre under recovered and the diesel price under recovered by R2.65. Of note is that it is not expected to have a big effect on the inflation rate for September, as the diesel price is likely to still trade lower than the R23.96/litre than the price in September last year.
In the US, share prices last week also contracted strongly. The Dow Jones Industrial index traded down by 2.19% and ended the week mostly flat. The S&P500 index lost 2.0% and the Nasdaq 2.3%. All three indices are still much higher for the year-to-date gaining 4.3%, 14.25% and 21.7%, respectively.
This coming week, domestic financial markets await the start of the BRICS summit on Tuesday and the release by Statistics SA of the inflation rate for July. It is expected that the increase in the CPI in July was 5.0% against the 5.4% recorded in June. The BRICS summit will be evaluated my financial markets against a “political” or “economic” summit.
On global markets eyes will be on Fed chairperson Jerome Powell’s speech and the speech by the ECB President Christine Lagarde on Friday as well as the release of US durable goods sales for July on Thursday. In Europe, the ECB will announce the inflation rate for the Euro-Zone for July on Tuesday. Japan will also release its inflation number for July on Tuesday.
Chris Harmse is the consulting economist of Sequoia Capital Management.