Inflation and third wave fear devastating for SA equities
By Chris Harmse
STOCK prices on the JSE came in for a big sell-off last week. Further increases in US treasury rates and fears for a surge in developed market inflation started the sale of South African equities last Tuesday.
These uncertainties on inflation and future interest rates were partially dispelled by the US Federal Reserve’s decision last Wednesday to keep interest rates and its purchasing of securities programme intact.
However, the selling spree continued last Thursday and Friday after worries about the slow pace of vaccination against Covid-19 outside the US, as well as further stringent lockdown measures in Europe. Italy is shutting down its schools and shops, Brazil plunged into its deadliest surge of infections, and Spain and the UK declared an emergency lockdown for a month, France for two weeks and Germany for four weeks.
These conditions led to the dollar moving stronger against most currencies, especially the pound and the euro. Risky disinvestment from emerging counties followed the uncertainties around the pandemic and raising US treasury rates.
Domestically retail sales decreased 1.6 percent in January of 2021 over the previous month and is still -3.5 percent down on last year’s number that was before the Covid-19 pandemic.
The FNB/BER Consumer Confidence Index for South Africa, however, moved higher to -9 in the first quarter of 2021. This is slightly higher than the -12 the previous quarter, but a welcome improvement on one of the lowest rates ever of -33 during the second quarter of 2020, the first quarter after the total lockdown.
South Africa's manufacturing production was down by 3.4 percent from a year earlier in January of 2021, following an upwardly revised 1.9 percent rise in the prior month and worse than market expectations of a 1 percent fall.
On South African Financial markets, shares took a hammering, whilst bonds and the rand stood their ground. The all share index during last week lost 2 298 points or 3.7 percent. This is the strongest weekly decline since the second week in March last year, just before the lockdown. Despite better commodity prices, especially the platinum group of metals and the gold price, resource stocks were also sold heavily.
The Resources 10 index lost 5.3%. Industrials also had a negative week and the INDI25 index was sold off by 1.1 percent even after a strong recovery in the Naspers share price on Friday, which could not prevent the decline in the index. Despite the stronger rand, Financials had a devastating week with the FINI15 that moved weaker by 6.7 percent. Listed property was sold down by 2.7 percent.
Despite a stronger US$ against most currencies, the rand stood its ground for most of last week. At one stage the currency traded around R14.63 to the dollar against rates of higher than R15.00/$ for most of the previous weeks. At the close of the JSE on Friday the currency was on R14.70 to the dollar or 31 cents stronger than the R15.01 close the previous Friday. Against the pound the currency improved to R20.41 from R20.84 the previous week. And against the euro the rand gained 37 cents and on Friday traded at R17.52.
This coming week all eyes will be on the release of South Africa’s leading business cycle indicator by the Reserve Bank on Tuesday as well as the start of the meeting of the Monetary Policy Committee (MPC).
Stats SA will announce the latest inflation rate (CPI) for February on Wednesday. It is expected that the rate had increased marginally from 3.3 percent to 3.4 percent.
On Thursday Stats SA will release the February producer price inflation rate (PPI) for February. On Thursday afternoon the MPC will announce its interest rate decision at a news conference. It is expected that the MPC will keep the repo rate unchanged at 3.5 percent. The market, however, will await the MPC’s announcement on when the next move in the repo rate will be. At the previous meeting it was announced that the MPC expects two increases in the repo rate during the second part of 2021.
Globally, analysts and investors will await the latest unemployment rate, inflation rate, as well as retail sales announcements for the UK. The US will release various home sales data during the week as well as its February personal income and spending data. Most developed countries will publish their Purchasing Managers Indices for March.
Dr Chris Harmse is an economist at S3 Capital Financial Planners.
*The views expressed here are not necessarily those of IOL or of title sites