Home Opinion and Features Markets suffer on back of US interest rates, local elections

Markets suffer on back of US interest rates, local elections

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THE ‘MARKETS ON MONDAY’ COLUMN: Global equity prices as well as emerging markets’ foreign exchange rates suffered the same fate, writes SA economist Chris Harmse.

Voting at the Centurion municipal offices. Picture: Jacques Naude, Independent Newspapers

ALTHOUGH there is still no evidence of the direct effect of the outcome of the national elections on South African financial markets, it seems negative global sentiment contributed to the large contraction on the JSE and the sharp depreciation of the rand exchange rate last week.

Global equity prices as well as emerging markets’ foreign exchange rates suffered the same fate.

Most global bourses in general and US equity experienced large outflows for the first time in four weeks over the past seven market days.

Stock markets were hit by rising bond yields and uncertainty over the timing and extent of US Federal Reserve interest rate cuts. Net outflows from US equity funds amounted to $7.6 billion (R143bn) last week.

At the same time, the yield on the 10-year US Treasury note reached a four-week high. This was due to a survey that surprisingly pointed towards an improvement in consumer confidence in May, which is not good for inflation expectations and, therefore, a risk for the US Fed to start to cut its bank rate. This was despite the announcement that the second estimation of the growth in the gross domestic product of the US for quarter one 2024 came in at 1.3%, lower than the expected 1.5%.

On Wall Street the large outflow of portfolio capital contributed to the Dow Jones Industrial index losing 2.6% last week, while the S&P500 index was down by 1.6% and the Nasdaq traded down by 1.7%.

On the JSE, the All Share index lost 2.8%, the All Share Industrial index was down by 2.7%, while the financial board traded down by 4.2%.

Financial shares are normally a strong indication of market sentiment towards domestic economic and geopolitical issues. In this sense, the uncertainty on the type of coalition that the national government will form within the next week reflects nervousness towards South African financial assets. Resource prices stood their ground last week and contributed towards the Resource 10 index losing only 1.7%.

On the foreign exchange markets, the rand exchange rate weakened sharply and in line with other emerging market currencies. Against the dollar, the rand depreciated last week by 42 cents, from R18.40 against the dollar to R18.82 (2.3%) on Friday. The sharp depreciation did take place from Wednesday, the day of the election, from R18.28 with 55c once the results from the election started to be released.

The uncertainty on the type of coalition – as the ANC did not win the election with a majority vote – will prevail and put pressure on the rand. The emerging market/$ index depreciated by only 1.3% last week, indicating that the national election did contribute towards a weaker rand.

Bond rates also reflect negative sentiment, given the uncertainty about the coalition government to be finalised this week.

The Monetary Policy Committee (MPC) of the Reserve Bank last Thursday announced that the repo rate will stay unchanged at 8.25%. This is the sixth consecutive meeting where the MPC decided to keep its repo rate unchanged.

SA Reserve Bank Governor Lesetja Kganyago said: “There remains concern that inflation expectations are elevated. After three years of inflation being above 4.5%, few survey respondents, especially from businesses and trade unions, now believe that inflation will be at 4.5% in two years’ time.”

Forecasts now indicate that inflation is expected to reach the midpoint of its target range in the second quarter of 2025, and that inflation for 2024 remains projected at 5.1%.

This coming week, financial markets in South Africa will be dominated by the speculation around the new government of South Africa, without the ANC as the majority government. Various scenarios around types of coalitions will affect sentiment for foreign and domestic investors.

Volatile equity, foreign exchange and bond markets can be expected as it will await the decision if the ANC would still want to retain President Cyril Ramaphosa.

On the economic front, Statistics South Africa will announce South Africa’s GDP economic growth rate for quarter one 2024. It is expected that the economy will advance by 0.5%, seasonally adjusted and annualised in quarter four 2023, against the 1.5% growth recorded in the corresponding period in the prior year.

Absa will announce its manufacturing purchasing managers’ index (PMI) for May, while the new vehicle sales during May will be released on Monday. The country’s current account balance on its Balance of Payments will be published on Thursday.

Movements on global markets this week will be dominated by the release on Friday of the US non-farm payrolls for May. This is one of the main data series that the Federal Reserve monitors that influence its interest rate decision. It is expected that the US economy created 180,000 new jobs last month (175,000 in April) and that the unemployment rate remains at 3.9%. If more jobs were created and the unemployment rate is lower, financial markets will react negatively. Various PMI ‘s for different countries over the world that will be published this week will also be of interest.

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

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