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Financial markets heading for strong year-end

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MARKETS ON MONDAY: Financial markets locally and globally continued to recover strongly during November and most had wiped out losses during the first ten months of the year, writes economist Chris Harmse.

Not only did the inflation rates of most countries start to subside but real economic recovery seems to have turned around so that most economies should avoid another recession. File picture

FINANCIAL markets locally and globally continued to recover strongly during November and most had wiped out losses during the first ten months of the year.

The sharp increase in interest rates by most central banks, the sharp increase in oil and food prices and the renewed military conflicts in the Ukraine, and since last month in the Gaza strip, had led to a reminder of the black swan occurrences, notably the global sub-prime crisis and the effects of the Covid-19 pandemic.

It was anticipated by many economists and market analysts that the US and other developed world economies would move into a recession, the second within three years.

The downward movement in the oil price, as well as other energy and food prices over the last three months, however prove that tighter monetary policies started to bear fruit.

Not only did the inflation rates of most countries start to subside but real economic recovery seems to turn around so that most economies should avoid another recession.

Most international institutions, like the World Bank and the IMF, as well as the South African treasury forecasted that the South African economy would likely grow by double (0.8%) in 2023 than the 0.4% anticipated estimation during the first quarter of this year.

Given this more positive mood equity markets are now discounting recovery in companies headline earnings and share prices in anticipation of lower interest and inflation rates in 2024 and countries recovering from a possible recession.

On the JSE, the ALSI gained 8.3% in November and by Friday is already 3.4% higher year-to-date. Most of the other sub-indices also turned around in November. The financial board (Fin15) increased by more than 9.1% last month, with industrials (IND15) gaining 9.3%.

Share markets also closed strongly for the week on Friday.

The rand exchange rate is moving more volatile over the last month and seems to seek a more stable level. The stronger gold price tends to support a stronger rand, but then again, the uncertainty on the next move by the FED on US interest rates next week (13 December) gives rise to a volatile movement in the US dollar against other currencies.

The rand traded between R18.18/$ and R18.98/$ with still no clear indication of either direction.

In the US, stock markets also had a very good month for November. The Dow Jones Industrial index gained 8.8% over the month, the S&P 500 was up by 8.9% and the tech board index Nasdaq improved by 10.7%.

Given prospects that the Fed will indicate next week with more certainty that the end of the current interest cycle is reached, it is expected that equities will also record a similar month in December.

This coming week local markets will await the release of South Africa’s economic growth rate for Q3. It is expected that the annual growth rate (year-on-year) was 1.0%. This is lower than the 1.6% recorded in Q2.

The total annual growth rate for 2023 is still forecast to be 0.8%.

On Thursday the South African Reserve Bank will publish the figures on South Africa’s current account of the balance of payments for the third quarter 2023.

It is expected that the current account deficit will be a bit lower at R1.05 billion against the R1.67bn recorded for the second quarter.

On global markets the attention will turn to the release of the US non-farm payrolls on Friday. It is expected that the US job market created 160 000 new jobs during November and that the unemployment rate remained on 3.9%. If the actual number of new jobs is less or the unemployment rate is higher, the world financial markets will discount that the FED will keep its bank rate the same at the end of its last meeting of the year that takes place next week.

The European Union will announce the Euro Zone economic growth rate final estimate for Q3 on Thursday. It is expected that the annualised GDP growth was 0.1% against 0.5% year-on-year rate during Q2.

* Chris Harmse is the consulting economist of Sequoia Capital Management.

– BUSINESS REPORT

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