Is the current strong recovery of global and South African financial markets just a temporarily fly by night, or like a dead cat falling out of a tree and bouncing before collapsing again?
The answer lies in evaluating the prospects of the world and domestic economy stabilising and being ready for a return to post Covid-19 levels.
In the US it was announced that the country had created only 175 000 new jobs in April, the lowest monthly addition since October 2023, and almost half the 315 000 new jobs created in March 2024. This seems to kick-start the reality that the US Federal Reserve’s interest rate policy is starting to show effect.
The reaction of a weaker US dollar – and global central banks, especially European central banks, turning dovish – may start the downward cycle in world interest rates.
Analysts now expect central banks may start to cut rates at their meetings over the next three months: The euro zone on June 6; Sweden on June 26; Canada on July 24; the UK on August 1; and the US at their meeting on September 18.
Financial markets over the past two weeks started to discount the above scenario as equity prices turned around sharply, bond rates fell and currencies appreciated against the dollar. This positive sentiment is dominating South African markets.
On the JSE, the All Share Index traded 2.7% higher last week, following the even stronger recovery of 2.8% in the previous week. The index reached its third-highest level at 78 464 points on Friday, gaining 3.64% already for the year-to-date.
The All-Industrial Index recorded a new record elevated level of 115 407 points on Friday. On the resources board, the RES10 index shot up by 5% last week, trading more than 10% higher since the beginning of the year.
The weaker US dollar and global optimism on the expected turnaround in interest rates boosted precious metal prices. The gold price last week jumped by $60 (R1113) an ounce and traded above $2 364 at the close on Friday, while the platinum price shot up by $30 to $996.
On the foreign exchange market, the rand exchange rate reflects the positive global sentiment on interest rates. Supported by the strong increase in precious metal prices, the rand appreciated by a further 10c last week to R18.42. It has now gained 80c from its weakest point of R19.20 on April 24.
The oil price continues to decrease and Brent oil traded lower than $83 at $82.74 on Friday. Given the stronger rand and much lower Brent oil price since the Central Energy Fund’s last calculation of the fuel price on April 26, the prices for both 93 and 95 ULP petrol became over recovered by 49c per litre and the price for 0.005% diesel by 73c per litre.
Given the weight of 4% in the inflation basket, as well as prospects of lower increases in food prices, the inflation rate is likely to decrease in the direction of the midpoint of the Monetary Policy Committees’s target of 4.5%.
US equity prices continue their upward trend last week. The Dow Jones industrial index increased by 2% last week, trading 2.8% higher for the month-to-date. The S&P500 index rose by 1.6% last week and has been up 10.1% since the beginning of the year. In the UK, the FTSE 100 increased last week by 2.7% (6.0% up for the month-to-date). In Germany, the DAX40 improved by 4.3% last week.
This coming week, the economic calendar for domestic indicators awaits, tomorrow, the release by Statistics South Africa of the unemployment rate for quarter one 2024. It is expected the jobless growth rate will increase marginally, from 32.1% to 32.3%. StatsSA will also publish the March data on mining and gold mining production on Wednesday, and the retail sales for March, also on Wednesday.
Movements on global markets this week will be dominated by the policy speech of US Federal Reserve chairperson Jerome Powell tomorrow and the release of the US inflation numbers for April on Wednesday.
Chris Harmse is the consulting economist of Sequoia Capital Management and a senior lecturer at Stadio Higher Education.
BUSINESS REPORT