Negative sentiment haunts shares and the rand
Fear of full-scale trade war between the US and China given the tit-for-tat tariff announcements fuels sentiment towards a possible world-wide recession sooner than later.
Last week, the US increased tariffs on more than $20billion (R287.7bn) Chinese imports with a treat to impose higher tariffs on the remaining more than $300bn imports. The US had also landed another blow by putting Chinese telecoms equipment maker Huawei Technologies on a blacklist that could make it almost impossible to do business with US companies.
The escalating trade war developments created further havoc on global share markets. Since the previous Tuesday the S&P 500 index on Wall Street had decreased by more than 4.5percent up to last Wednesday. Hope that some agreement between the two major economies in the world still can be reached had contributed to US stocks to recover somewhat during the last two days.
The Trump administration announced that it was prepared to delay any levies on car imports from Japan and Europe by 180 days and was also willing to lift steel and aluminium tariffs on Canada and Mexico. The dollar, however, continues to rise to a year high and Brent oil had bounced back to levels above $72.50 (R1043) a barrel. The uncertainty on the Brexit deal-no-deal also contributed to further negative market sentiment.
Together with these global geo-political tensions, uncertainty on the ability of the South African economy to escape the claws of recession remains, driving share prices lower and the rand to wipe out all the positive post-election sentiment.
The announcement by StatsSA that the country’s economy had added another 62000 people to the jobless numbers during the first quarter and 220000 over the last year, pushing the unemployment rate up to 27.6percent had drawn attention to the seriousness of the current state in the economy.
Retail sales had improved by only 0.2percent during the quarter, and although it had increased by 1percent in the first quarter of 2018 compared with a year ago, shows clearly that economic growth will stay sluggish this year.
Rating agency Moody’s announced last week that although there are prospects for healthy changes in the economic performance of the country under President Cyril Ramaphosa, South Africa's challenges of low growth, steadily rising debt, leveraged state-owned entities and weakened institutions will take years to deal. These remarks point towards ratings of South African sovereign debt to remain near junk status for now.
The above negative sentiment had caused havoc on the South African financial markets last week.
On the JSE the Alsi lost 597points, or 1.05percent, last week and is now down by more than 3100 points or 5.3percent since May 3.
The rand had also lost all positive territory gained after the election. On Friday evening the currency had traded at R14.43 to the dollar. This was 27cents or 2percent weaker than the R14.16 of the previous Friday.
Given the steady increase in the oil price to above $72.50 on Friday, a possible lowering in fuel prices at the beginning of June was wiped out and consumers may expect yet again another increase.
This week all eyes will be on the monetary policy committee's (MPC) meeting as well as the announcement of the inflation rate for April by StatsSA on Wednesday.
It is expected that the CPI had increase by 5.2percent, against the 4.9 percent in March.
It is also expected that the MPC will keep the repo rate unchanged but with a hawkish tone of increased risks.
Chris Harmse is the chief economist at Rebalance Fund Managers.