OPINION: JSE between a rock and a hard place
After the news last Friday that the US economy created many more new jobs (220000) than expected (180000), most investors and analysts believed that the changes for a cut in the bank rate by the Fed later this month seemed unlikely.
The release of gloomy trade data for China on Friday also did not help.
In reaction to the better-than-expected job numbers in the US, shares on the JSE took a tumble last Monday and Tuesday and the ALSI on the JSE lost 626 points or 1.1 percent, trading at levels lower than 57000.
This was more than 2000 (3.4 percent) points lower than the 58973 that was reached a mere three weeks ago on July 20. The testimony by US Fed chairperson Jeremy Powell in front of the Senate last Wednesday had changed market sentiment completely round and optimism of a cut in 10 days now prevails. Domestically it was announced that the current governor of the Reserve Bank, Lesetja Kganyago, will serve for another five years. These two “news” items not only saw the rand exchange rate dipping under the R13.80/$ level (around 30 cents lower than the previous week) but pushed the ALSI up again by 661 points (1.1 percent) to 57597.
In reaction to the new “revived” prospects for a cut in the US bank rate as well as the news that the US inflation rate came down from 1.8 percent in May to 1.6 percent pushed share prices on Wall Street to new record levels with the Dow Jones Industrial index breaking through the 27000 level for the first time, trading at 27227 on Friday evening local time.
Shares on the South African bourse however did not ride the same positive tide as news on renewed worries on the effects of the US/China trade war will have more negative consequences for emerging economies trading with China. These fears seem to have been realised as it was announced that China’s exports in June were down by 1.3 percent and imports had plunged at a faster 7.3 percent.
This lit up negative sentiment that the Chinese economy is contracting much more than anticipated. The JSE in reaction lost 320 points last Thursday and Friday to close at 57277 or 0.5 percent down for the week. The importance of this seeming break in the correlation between the movement in share prices on the JSE and on Wall Street is that the South African economy and for that matter the equity market may not reap the fruits of ongoing rallies in US share prices in the light of lower US interest rates and lower inflation.
Despite this dilemma on South African equity markets, gold rose and by Friday traded above the $1400 (R19542) level ($1409), supported by an easing dollar and weaker-than-expected Chinese trade data, which stoked global growth concerns. The rand exchange rate held its stronger levels at R13.99/$, R17.54 against pound sterling and at R15.72/.
This coming week all eyes will be on the meeting of the Monetary Policy Committee (MPC) of the Reserve Bank. There is no consensus if the MPC will cut the repo rate at this meeting. The inflation rate for June will only be announced next week and the US Fed also will only decide a week later if it will cut its bank rate. Globally, China will announce its GDP economic growth rate for the second quarter today. A lower than expected rate may lead to a gloomier outlook for South African share markets.
Chris Harmse: Chief economist Rebalance Fund Managers.