ALTHOUGH South African equity markets ended last Friday in negative territory, the effect of the Israeli conflict as well as the forecast of the International Monetary Fund (IMF) on prospects for the South African economy led to a strong recovery in share prices for the whole of last week.
Foreign investors did use the dollar as a haven against the Middle East uncertainty. However, the flight to gold had a bigger impact. The price of the precious metal had increased by more than $110 over the past seven days and ended Friday on $1930 (R36684) an ounce. It resulted in a strong recovery in commodity and precious metal share prices, and the rand exchange rate.
The IMF now forecast that the South African economy will grow three times higher than their previous estimation six months ago. The organisation expects the economy (real gross domestic product (GDP)) to grow at 0.9% for 2023 against the previous forecast in April of only 0.3%. The lower levels of load shedding are given as the main reason.
On the JSE, the all share index increased by 4.1% over the last seven trading days. The index is now also in positive territory over the last month and for the year-to-date. The resources board was the big winners last week and the RES10 index shot up by more than 8.0%.
Given that the gold price had surged by $53 an ounce last Friday, the metals and mining index improved by 4.9% on the day. It is now expected that this tendency will continue. The big spike in the gold price caused the rand also to appreciate strongly by more than 50 cents against the US dollar over the last week.
The currency traded at the close of the JSE on Friday at R18.99 against the dollar. In return the “domestic” share prices, as proxied by the financial index, also performed strongly last week.
The FIN15, although under strong pressure on Friday, losing 1.04%, managed to gain by 2.04% over the last week. Industrials also shone last week as the IND25 index gained 2.4%
On the negative side, however, the risk remains that the US may increase its Federal Reserve interest rate in two weeks’ time. The minutes of the Fed's September meeting that were released last Wednesday showed that the US monetary authorities are no longer only worried about the risks of a renewed surge in the inflation rate, but also the effect that the main source of the expected increase in inflation, namely energy and food markets prices, which will cause a slowing world growth, labour unrest and yet again tightening financial markets.
There is, however, a bigger sentiment from top Fed officials that the current rise in US Treasury yields “may well take the place of further increases in the policy rate, serving to slow the economy, and inflation, beyond any further central bank action”.
US markets remained strong last week with the Dow Jones industrial index gaining 1.23%. The S&P 500 index traded up by 1% and the tech-rich Nasdaq composite index traded 0.6% in the green. It seems now that the effect of the Middle East conflict will lead to an inverse relationship between the movement in US and South African equity and bond prices because of higher metal prices and a stronger rand.
This coming week local markets will await the release of Statistics SA of South Africa’s inflation rate and retail sales on Wednesday. It is expected that the inflation rate will increase sharply from 4.8% in August to 5.2% in September and core inflation from 4.8% to 5.0%. (Core inflation excludes the prices for fuel and food.) It is projected that the country’s retail sales had shrunk further from -1.4% (year-on-year) in July to -2.4% in August.
On global markets analysts and economists await the speech by the Fed’s chairperson, Jerome Powell, on Wednesday. Of importance is the release of China’s economic growth during quarter three 2023. It is expected that the GDP of the world’s second biggest economy increased on an annual basis by 4.4%, against the 6.0% growth recorded during quarter two. The announcement of the latest retail sales data for the US on Tuesday will also attract attention
Chris Harmse is the consulting economist of Sequoia Capital Management.