Despite the hawkish stance of the US Federal Reserve – which not only increased its bank rate by another 0.75% last Wednesday, but also indicated that it was not the end of the interest hike cycle – South African equities, bonds and the rand exchange rate had one of their best recovery weeks this year.
The JSE all-share index shot up by 4.93% on Friday, gaining 4.2% over the past week, and is now 1.7% up for the year to date. The Resource 10 Index increased on Friday by a massive 9.25%, gaining in the week by 5.3%.
The gold price recovered on Friday by $42.81 (R776) per ounce to $1670 as the dollar depreciated sharply on Friday, The rand on Friday improved by 26 cents to trade once again lower than $18.00 ($17.97). The price for Brent crude oil, however, advanced strongly by $2.38 on Friday, closing on $97.05 against the dollar. It may be important to note that South African equities in future may not follow US stocks.
Fed chairperson Jeremy Powell remarked at a press conference last Wednesday that the Fed had to increase its repo rate by 0.75%, the fourth time in a row, and that another hike in January was a strong possibility. The Fed rate had pushed interest rates by more than 3% this year in six consecutive increases. Powell suggested a further increase is imminent and analysts are expecting another hike of at least 0.5% at the Fed’s next meeting.
US stock prices retreated strongly last Thursday. The Dow Jones industrial index traded down by 1.5% on Thursday, but recovered by 0.3% again on Friday, a clear indication of uncertainty and volatility. The index lost -1.07% for the week and is still -11.3% down for the week. This is in contrast with the +1.7% gain in the all-share index for the year so far.
Equities in Asia also recovered strongly on Friday. The Hang Seng index in Hong Kong gained 5.4% last Friday, ending the week 9.0% higher, after a week of drama and a collapse the previous week. Tencent holdings, in which South African giant Naspers hold the majority stake hand, shot up by 18.71% last week. This had led to the strong recovery of Naspers (18.80%) and Prosus (16.13%) last week, contributing to the sharp increase of the JSE.
It seems that other factors, such as Asian share prices and the gold price, have also started to play a key role in financial market performances in South Africa, and not only changes in the US economy. This may be a factor to take into consideration in planning financial returns in investment decisions.
This coming week on Thursday, Statistics SA will release the mining and manufacturing production data for September. It is expected that both mining (-4.3%) and manufacturing (-2.9%) were down on a year ago. This will be a sound indication that the South African economy is contracting.
Globally, investors will turn their attentions to the release of the US inflation rate for October on Thursday. US CPI had decreased only marginally to 8.2% in September. It is expected that the inflation rate had decreased to 8.0% in October. If the rate comes in lower, share markets will turn bullish as it will discount a lower rate hike by the Fed at their next meeting. China will release its inflation rate for October on Wednesday. And expects a lower 2.5% than the 2.8% registered in September. This may boost equities in Shanghai and Hong Kong. In Europe, the release of the Eurozone retail numbers for September will also draw attention.
Chris Harmse is an economist at CH Economics and lecturer at the School of Commerce at Stadio University.
BUSINESS REPORT