Share indices on the JSE had one of its biggest volatile movements in more than a year. These movements were driven by a sharp increase in the prices for commodities, especially gold and platinum, and foreign buying of South African shares and bonds that caused sharp increases, whereas higher inflation interest rates across the globe caused big falls in equity prices.
The all share index increased sharply from 75 160 points at the opening last Monday to a new record high of 76 233 points (1.4 percent) on Thursday, after the index gained 1 221 points, or 1.6 percent, on Wednesday. On Friday, following sharp decreases in the US Nasdaq (-1.8 percent) on Thursday, and in Germany (Dax -2.2 percent) and the UK (FTSE -1.33 percent), all on inflation and higher interest fears, the all share index lost 1 399 points or 1.83 percent alone on Friday. The Index ended the week 0.5 percent lower. The Nasdaq closed Friday sharply down losing 6.5 percent over the week. This index is now officially in a downward correction after it has lost more than 10 percent since the beginning of the year. The US, Canada and South Africa will decide on interest rates this coming week.
Foreign demand for South African assets as well as the strong increases last week in both the gold and platinum prices by $31 (R484) to $1 821 and $972, respectively, had contributed to a strong appreciation of the rand. Against the dollar the rand appreciated over the week by 31 cents to R15.06 to the dollar on Friday, while bond rates had a strong rally and the yield on the R186 had increase by 1.9 percent.
Inflation rates in most developed and developing countries started to increase sharply over the last year. The strong increase in the prices for oil and other commodities, especially raw materials, added to cost push factors, while the biggest stimulation packages ever, were introduced by developed market economies to boost economic growth after the worldwide recession during the first six months of 2020 due to Covid-19 lockdowns.
These stimulation packages increased demand for most consumer goods and services to unprecedented high levels and shortages and backlogs in the supply chain pushed prices even higher. Especially energy prices reached 15-year high levels.
In South Africa the domestic price for petrol for the first time past the R20 per litre. South Africa’s inflation had accelerated from 2.9 percent in February 2021 to 5.9 percent in December 2021. In the US the inflation rate soared from 1.4% in January 2021 to 7 percent in December 2021. This is now the highest level of the inflation rate since June 1982. Similar movements in other developed world countries took place during 2021. In the UK, the inflation rate accelerated from 0.7 percent a year ago (January 2021) to 5.4 percent in December 2021, its highest level since March 1992.
In the EU the rise in its CPI had the same pattern, rising from 0.9 percent in January 2021 to 5 percent in December 2021, the highest level since July 1991. The danger behind these sudden strong increases and South Africa will make is that most of the policymakers of these countries are reluctant to increase its interest rates as had been done in previous periods of high inflation. South Africa was one of the first of the emerging economies that raised interest rates to stay in front of the cycle.
This coming week the US, South Africa and Canada will make their decisions on interest rates. The US Federal Open Market Commission (FOMC) will start its meeting on Tuesday and release its decision on the bank rate on Wednesday. In South Africa the Monetary Policy Committee (MPC) will meet from Tuesday and the president of the Reserve Bank will announce the decision on the repo rate on Thursday. It is expected that both committees are likely to increase their bank (repo) rates. The Bank of Canada will also release its interest rate decision on Wednesday.
Most developed countries will announce their various Purchasers Managers Indices (PMI) during the week. US crude oil and gas stock changes will be published on Wednesday and will influence crude oil prices. The US will publish its expected quarter one (Q1) gross domestic product (GDP) growth number on Thursday as well as the durable goods orders data for December. France, Spain, and Germany will announce their respective Q1 GDP growth numbers.
It is expected that share prices across the world will continue their downward trend.
Dr Chris Harmse is an economist at CH Economics
*The views expressed here are not necessarily those of IOL or of title sites.
BUSINESS REPORT ONLINE