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Financial markets remain under pressure

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THE MARKETS ON MONDAY COLUMN: Local financial markets remain under severe pressure since the beginning of the year. Part of this is due to the South African economy experiencing a perfect storm, writes economist Chris Harmse.

The rand remains under pressure. Picture: Ian Landsberg, Independent Newspapers

LOCAL financial markets remain under severe pressure since the beginning of the year. Part of this is due to the South African economy experiencing a perfect storm.

Economic growth hovers just above a recession as the gross domestic product (GDP) in real terms recorded only a 0.1% increase in quarter four of 2023. The inflation rate started to increase towards the 6% upper target of the SA Reserve Bank’s Monetary Policy Committee (MPC) and the rand remains under pressure.

Fuel prices are increasing due to higher global crude oil prices and electricity tariffs will increase by 12.3% from July 1. In the middle of this storm, interest rates remain high with little prospects of decreasing before the second part of the year.

The All Share Index total return index lost 2.2% since the beginning of the year and only improved marginally by 1.5% over the past year. Listed property seems to recover, gaining 8.6% since March 2023, while bonds just beat the inflation rate over the past 12 months (5.5%), and due to the weaker rand suffers to obtain positive returns since the beginning of the year.

On global markets the sticky high US core inflation, strong employment, and US retail sales, contribute to expectations that the US Federal Reserve Open Market Committee (FOMC) will only start to decrease interest rates during the second part of 2024.

The better-than-expected growth in the US economy of 3.4% in quarter four 2023, supported by consumer spending and non-residential business investments, boosted the strong US GDP growth.

The job report for March, which was published on Friday, was also much more than expected. The US economy created a robust 303,000 jobs in March and the jobless rate dipped to 3.8%, extending a historic streak of unemployment below 4%. Markets expected 200,000 new employment opportunities and the unemployment rate to remain on 3.9%.

In reaction, US share indices recorded a strong recovery on Friday, after a sharp decline earlier in the week. The Dow Jones Industrial Index recovered by 0.8% after the release of the job report but still ended the week down by 2.27%, gaining 3.15% since the beginning of the year and had increased by 16.18% over the last year.

The S&P500 Index lost 1.02% last week, but also recovered on Friday by 1.2%. The index is now 9.3% up for the year-to-date and a 26.8% over the past year.

Given the bullish sentiment in precious metals, with the gold price hitting a record high of $2,330 (R43,640) on Friday, the rand, despite the better-than-expected US job numbers, appreciated strongly last week.

The currency appreciated from R18.85 to the dollar last Monday to R18.68 on Friday. On the JSE share prices remain bearish. The All Share index ended the week flat gaining 0.32%. The index is still 2.8% down for the year. Financial shares, as a proxy for domestic economic and market sentiment, ended the week 0.7% in the red and already had lost more than 8% since the beginning of the year.

This coming week the economic calendar for domestic indicators awaits the release by the Reserve Bank of the country’s level of Foreign Reserves on Monday. On Thursday Statistics South Africa will publish the mining and manufacturing production numbers for February.

The financial market sentiment domestic and globally awaits the release of the US inflation rate data for March on Wednesday. The expectations are that the CPI had increased by 3.4%, higher than the 3.2% recorded for February.

The core inflation rate should have come down marginally from 3.8% to 3.7%. Also, on Wednesday the Federal Reserve will release the minutes of its meeting held in March. Markets will be interested in the sentiment that the FOMC committee expressed to get indication when changes in the Fed’s bank rate can be expected.

* Chris Harmse is the consulting economist of Sequoia Capital Management and a senior lecturer at Stadio Higher Education.

– BUSINESS REPORT

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