Local financial markets may find themselves facing a perfect storm in the months to come.
Just like the storms that struck with Covid-19 and the Ukraine-Russia conflict, which knocked the global economy and financial markets, so too a storm is gathering now.
The storm this time is due to the Middle East conflict in the Gaza strip, as well as rumours of possible air strikes between Iran and Israel. Developing markets as a result face unprecedented sharp increases in the oil price and further increases in US and developed market interest rates.
The news last week that the US inflation rate had increased to 3.5% in March 2024, up from the annual rate of 3,2% in February and core inflation back on 3.8%, is an early indication of the disastrous effects of a strong increase in oil prices.
Brent crude has increased from $81 (R1524,) on March 12 to Friday’s close of $91 per barrel. Some analysts now predict the oil price may quickly accelerate to $120 per barrel. The oil price had increased from $32 per barrel in April 2020, at the beginning of the Covid pandemic, to $110 per barrel by June 2022.
The storm this time around may be more severe as US and world interest rates are more than three times higher than in April 2020. The room for fiscal stimulation this time is limited. This storm may push the global economy into unprecedented stagflation – namely, almost no to negative economic growth with higher levels of inflation.
Expectations in US financial markets have now turned to favour two rate cuts this year, rather than three. In reaction to the hawkish mood of the US Federal Reserve and a turnaround in inflation expectations, US shares started to pull back.
Over the past two weeks, the S&P500 has already lost 2.3%. The dollar, together with gold is the haven for investors. Bullion has increased by $80 per ounce over the past week and traded near $2 380 per ounce on Friday.
On the foreign exchange market, the rand lost 50 cents, from R18.44 against the dollar to R18.94 since the announcement of the sharp turnaround in the US inflation rate last Wednesday.
On the JSE, a mixed bag of sentiment was present last week. The All Share Index gained 1.63%, backed by resources due to strong precious metals prices.
The Resource 10 Index jumped by more than 8% since the previous Friday. Financials and Industrial shares – which are more of a representation of domestic economic prospects facing the higher oil price, weaker rand, election uncertainty and another sharp increase in electricity prices at the beginning of June – are losing much ground. Industrials lost 2% last week, while the Financial 15 index traded down by 3.2% since the previous Friday.
This coming week, the economic calendar for domestic indicators awaits the release by Statistics South Africa of the country’s inflation data for March on Wednesday. It is expected the main inflation rate will come down from an annualised 5.6% in February to 5.4% in March. Also on Wednesday, Stats SA will announce the country’s retail sales numbers for February. It is expected that sales at retail shops decreased in real terms by -1.8%, better than the -2.1% in January.
On global markets, the US will release its retail numbers for March today. It is expected that the volume of sales at retailers grew by 0.4% year on year against the 0.6% recorded in February.
On Tuesday, China will release its quarter one 2024 economic growth rate. It is expected that the Chinese economy has increased its real gross domestic product by 5%, a bit lower than the quarter on quarter annualised rate of 5.2% in quarter four of 2023. Most Eurozone countries and the UK will also announce their inflation rate numbers for March this coming week.
Chris Harmse is the consulting economist of Sequoia Capital Management and a senior lecturer at Stadio Higher Education.
BUSINESS REPORT