SA markets stand firm as Trump tariffs shake global economy - Chris Harmse

Chris Harmse

Despite negative market sentiment on most global equity and exchange rate markets last week, following the implementation of tariffs by US President Donald Trump, the Rand and the JSE stood their ground.

The big winner of the week is the Rand/Dollar exchange rate. The retaliation of Mexico, Canada, and China against the US by also imposing tariffs against the US, and fears of higher domestic inflation in the US, have shaken markets. The increased probability that the Federal Reserve (Fed) may abstain for a second time in a row from easing interest rates has led to dollar weakness.

The rand improved sharply last week against the dollar, gaining 52 cents from R18.65/$ the previous Friday to R18.13/$ last Thursday (R18.25/$ at the close on Friday), and trading 2.6% stronger than at the beginning of the year. Against the British Pound, the rand lost 10c over the week, trading at R23.34/£, and lost ground against the euro, depreciating almost 50c to R19.83/€, losing 3.34% over the last seven trading days. The dollar dropped by more than 2.5% against the pound and more than 3.2% against the euro.

In February 2024, non-farm payroll employment in the US increased by 275 000 jobs. This was higher than the average monthly increase of 230 000 over the previous 12 months and, given that the core inflation rate had increased stronger than expected to 3.2% in January 2025, interest rate cuts are likely to be avoided by the Fed. The Dollar as a haven currency and asset is dwindling.

On the JSE, equity prices recovered strongly last week after some losses recorded the previous week. The All Share index (ALSI) increased by 3.0% last week, trading only 343 points away from a new record high. The ALSI is now 5.0% higher since the year-to-date. The Top40 index moved 3.3% higher last week, the FIN15 index was flat but still gained 0.3%, whereas the IND25 traded higher by 2.3% than the previous Friday. The weaker-than-expected economic growth rate of 0.6% for 2024, down from 0.7% in 2023, seems not to have affected equity markets and the Rand much.

On global stock markets, share prices in the US experienced their second consecutive negative week on the back of the global trade war with the US. On Wall Street, the Dow Jones Industrial index lost 2.4% last week and is now down by 3.4% over the last month. The Standard & Poor’s 500 Index (S&P 500) traded lower last week by 3.4% and has lost 4.2% over the last month. In the UK and Europe, equities moved sideways last week but are still stronger over the last month. The European Central Bank (ECB) is expected to reduce its benchmark lending rate by a quarter-point at the beginning of March.

It seems that the Trump tariffs against China may have blown up in his face, given the effect of the retaliation on investment sentiment towards Chinese shares. In Shanghai, the Shanghai share index increased by 1.3% last week, gaining 2.0% over the last month. China announced retaliation on about $13.9 billion (R254bn) worth of US exports at rates of 10% and 15%, which took effect on  February 10. This followed the Trump administration-imposed tariffs of 10% on all Chinese imports from the beginning of March. Early estimates are that the Chinese economy will grow by only 0.1% lower than before the tariff impositions, as retaliatory tariffs and a depreciation of its currency should absorb some of the tariff shocks.

The news last week that fuel prices in South Africa decreased by 7c per litre for petrol and 17c per litre for diesel since the beginning of March came as good news, not only for motorists, but also boosting chances for a further cut in the repo rate by the Monetary Policy Committee (MPC) of the South African Reserve Bank during the first six months of 2025.

The strong recovery in the rand exchange rate and the sharp decrease in the Brent oil price to less than $70 per barrel last week boosted chances for further decreases in fuel prices in the months to come. During the first week of March 2025, the price for petrol has already recovered by 83c per litre and the price for diesel by 76c per litre. A sharp decrease in fuel prices at the beginning of April will go far to keep inflation lower than 3.5% and will surely increase chances that the MPC will decrease its Repo rate sooner rather than later.

Domestically, investors and the public await the postponed national Budget speech to be delivered by the Minister of Finance, Enoch Godongwana, on Wednesday. Analysts will look at the budget in terms of what will happen to VAT, an increase in wealth income tax, and where the Treasury is prepared to cut expenditure, especially the wage and salary bill and other unnecessary “luxury” expenditure by state departments on travel, advertising, etc.

On global markets, investors wait for the release of the US inflation rate numbers for February on Wednesday. In January, the core inflation rate came down to 3.2%. Expectations are that the rate increased back to 3.3% last month.

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

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