Emerging markets defy negative sentiment
AGAINST many analysts and economists’ negative forecasts on the financial markets leading up to Friday if Joe Biden won the US presidential elections, the effects on the ground seemed to be the opposite.
As the results of the election pointed towards a Biden victory, markets ignored the devastating increases in Covid-19 infections, the US performed well.
Emerging markets in particular, were stronger, with equity prices soaring, currencies appreciating and bond rates dropping strongly (yield increases).
“Emerging markets are going to do better out of a Biden presidency,” said Charles Robertson, chief economist at Renaissance Capital, an EM investment bank.
He argued that equity and bond markets had not yet taken into account that eventuality, with big investors still stung by their failure to anticipate Donald Trump’s victory in 2016.
It is almost as if emerging markets became the “new safe haven” as their bond rates, exports and currencies “suffered” under the US- China trade war.
The higher rate of infections in Europe and the uncertainty around the Brexit-saga also contributed to investors turning to emerging markets
This positive sentiment towards emerging markets had the best effects this year on South Africa’s equities, currency and bond markets last week.
Foreign buying of South African shares and bonds contributed to the rand appreciating strongly for most of last week, breaking easily through the R16 to the dollar levels, with as much strong movements against the pound and the euro.
Against the dollar, the rand on Friday evening was at R15.75, an improvement of 56 cents (3.5 percent) on last week.
Against the pound, the rand had appreciated by 53c (2.2 percent) to R20.61 and against the euro the local currency gained 34c (1.8 percent) to R18.66.
On the capital market, the R187 bond had improved from 7.1 percent to 6.85 percent, an increase in the yield of 3.5 percent over last week.
On the JSE, equities improved strongly. The all share index gained 4 703 points (9.1 percent), to record the biggest weekly gain for the year to date.
Financials increased 7.3 percent, resources were up by 9.1 percent, while industrials moved higher by 9.7 percent and listed property index improved by 6.3 percent.
Data showing that job numbers in the US were improving steadily also helped the more positive sentiment on world markets. US unemployment rate had fallen to 6.9 percent in October, from the 7.9 percent recorded for September. This was the seventh consecutive decline in the US jobless number since the 14.7 percent mark at the beginning of the outbreak of Covid-19 in March 2020. The unemployment rate, however, still remains well above pre-pandemic levels of around 3.5 percent.
Gold and platinum prices also had improved strongly with gold gaining $60 (about R948) last week and traded at $1 942 an ounce on Friday afternoon, with platinum up by $47, at $899 an ounce.
The Brent crude price of lower than $40 a barrel for most of last week had a strong effect on the current over recovery in the prices for diesel and petrol. Petrol 95 ULP was over recovered by 56 cents a litre on Friday and the price for diesel 0.05 by 23c a litre since the previous fuel price adjustment on November 5.
This week all eyes will be on the unemployment figures for South Africa during the third quarter, to be announced on Thursday. It is expected that the unemployment rate will increase from 23 percent in the second quarter to 26 percent in the third quarter.
The SACCI business confidence index for October will be released today. Tomorrow, StatsSA will release the latest (September) numbers for manufacturing production and those for mining production on Thursday.
On global markets, investor interest will turn towards the release of the third quarter economic growth rate data for the UK, EU and Russia. Unemployment figures for the UK and France will also be of interest.
Apart from the reaction on the US presidential elections, eyes will also be on the US and Chinese inflation rate numbers.
Dr Chris Harmse is an Economist at CH Economics