Markets on Monday: Last week’s events left a trail of negative sentiment on South African equity, bond and foreign exchange markets, writes Chris Harmse.
LAST week’s events left a trail of negative sentiment on South African equity, bond and foreign exchange markets.
This was due to dissatisfaction over the late and disappointing reshuffle of the Cabinet by President Cyril Ramaphosa; the negative economic growth rate of -1.3% due to load shedding; the downgrading of South Africa’s foreign debt prospects by S&P500, from positive to neutral; as well as the discounting of a further US Federal bank rate increase on March 30, after the US non-farm payrolls on Friday.
At the close on Friday, the All Share Index was down by 1,839 points for the week (2.3%), now trading 3.2% lower than a month ago. The Industrial 25 Index lost -1.02% over the past seven days, while the Resource 10 Index gave up more than 4.0% last week on the back of lower commodity and metal prices. Financials as a proxy of SA Inc. shares lost 1.9%.
The rand came under pressure.
Against the dollar, the currency lost more than 50 cents in the first three trading days last week, to close at a new record high against the green back of R18.68 last Wednesday.
However, the rand started to appreciate strongly again last Thursday and Friday, and at the close of the JSE the rand traded on R18.36, still 18 cents weaker than the previous Friday (R18.18).
On the capital market, the R209 long bond traded the week much weaker at its close Friday on 11.29%, against 11.02% at the beginning of last week.
The negative growth rate of South Africa of -1.3% during quarter four was as expected. Also, it was forecast the growth rate for the whole of 2022 would be 2.0%, as indeed Statistics South Africa published last Tuesday. Economists and analysts now fear the economy may move into an official recession if the growth rate during quarter one 2023 also becomes negative.
South Africa’s retail sales had already shrunk by 0.6% in December, and it is expected that retail sales in January 2023 (month-on-month) will be -1.0% (this figure will be announced this coming Wednesday). On the production side, it is also expected that manufacturing production will have shrunk by -1.5% in January 2023 (month-on-month) and more than 5.0%, year-on-year.
And with the expectation that the Reserve Bank’s Monetary Policy Committee will increase its repo rate with its next meeting later this month, it is likely that the South African economy will be negative during quarter one 2023, pushing the country into yet another recession.
In the US, the non-farm payrolls were released on Friday. The market expected that the US economy would have created 205,,000 new jobs during February 2023. This after a record-breaking month of 507 000 new jobs that were added to the economy in January, pushing the US unemployment rate down to 3.4%, the lowest since 1969.
The US economy, however, created 311 000 new jobs during February. This continues to point to a tight labour market and that wage growth is likely to keep US inflation high and sticky.
US investors, economists, policy makers and analysts immediately reacted by discounting a certain increase in the Federal Reserve’s bank rate of at least 25 basis points at their next meeting. The unemployment rate also remains sticky at 3.6% and is far off the target set by the Fed of 4.2%. As a result, equities on Wall Street continued their sell-off on Friday evening. The Dow ended Friday 1.4% in the red and was down for the week by -4.3%. The index is now 4.68% lower over the past 30 days. The S&P500 dropped by 1.46% on Friday alone, lost 4.51% the past five days and is down by 7.2% over the past 30 days.
This coming week, investors and analysts will await the release of South Africa’s mining and manufacturing data for January 2023. It is expected that both have decreased by more than 5.0% on January last year. On Wednesday, Statistics South Africa will publish the retail numbers for January 2023. It is expected that sales at store counters have decreased by -1.0% in January and are -0.6% lower than a year ago.
On global markets, the UK will publish its unemployment rate for January 2023 on Tuesday. However, all eyes will be on the release of the US inflation rate on Wednesday. The market expects the increase in US CPI in February was 6.2%, and not much lower than the 6.2% in January 2023. The US will also release its retail sales numbers for February on Wednesday. The ECB will make its interest rate decision on Thursday and an increase of 50 basis points is expected.
* Chris Harmse is the consulting economist of Sequoia Capital Management.
– BUSINESS REPORT
