Markets on Monday: The main concern for South African financial markets remains the sharp depreciation of the currency, writes Chris Harmse.
THE MAIN concern for South African financial markets remains the sharp depreciation of the currency.
In last week’s report it was mentioned that the rand started to weaken after the unexpected decrease in US unemployment and sharp increases in wages.
These data set the platform for yet another increase in the Fed’s bank rate next month. This led to a depreciation of more than 50 cents to R18.60 to the dollar.
Since last Monday, however, geopolitical factors also started to play a major role in the free-fall of the rand. Various reports from domestic and international journalists on the desperate situation at Eskom, indicating that load shedding levels 8 and now higher are set to become a reality, set the negative tone.
The news that US inflation in April remains at 4.9% against the 5.0% in March improved the upside risks that US interest rates will be increased next month. This led to a much stronger dollar against most emerging market economies. The US dollar index has increased by around 1.0% last week. This pushed the rand to levels exceeding R19.10/$ and R24.05 against the pound by last Thursday.
The news on Friday that the US Ambassador accused South Africa of providing weapons to Russia pushed the rand to levels exceeding R19.50 to the dollar. At the close on Friday evening the currency traded around R19.36 and R24.14, despite the apology by the US ambassador.
Equities on the JSE stood their ground last week despite negative sentiment against South African assets. Although share prices remain volatile most indices moved positive over the last seven trading days since the US Fed increased interest rates in the US.
The all share increased 1.73% since 4 May. The industrial 25 index improved by 3.0% over the same period. Despite the weaker rand, the resource 10 index last week lost 1.50%, whereas financial shares (-2.23%) and the RSA All Bond Index (ALBI) (-3.4%) moved weaker on the back of the depreciated currency.
In the US, due to the sticky US inflation data, the Dow Industrial Index lost 1.1% last week, the S&P500 index moved lower by -0.5% and the Nasdaq tech index managed to gain +0.4%.
This coming week investors and analysts on South African markets await the release by Statistics South Africa (StatsSA) of unemployment rate for quarter one 2023. It is expected that the jobless rate came down marginally from 32.7% in quarter four 2022 to 32.5%.
On Tuesday StatsSA will announce the retail data for March 2023 and it is also expected that retail sales improved somewhat from -0.5% in February (y-o-y) to +1.5% in March.
On international markets the dominant economic indicator that will be released this week will be the US retail sales and manufacturing production data for April. It is expected that US retail data will show a recovery to 0.7% on the previous year, against the -0.6% recorded in March.
Manufacturing data, however, will show a contraction of -0.2%. The UK will release its unemployment rate for March on Tuesday, expecting it to have move sideways on a low 3.8%. Apart from US latest building permits to be announced this week and the speech by the US Federal Reserve chairperson Jerome Powell on Friday now other important economic indicators will be released.
We expect that the rand, global and domestic equity markets, and bond rates will recover this coming week.
* Chris Harmse is the consulting economist of Sequoia Capital Management.
– BUSINESS REPORT
