SA financial markets volatile ahead of Sona

SOUTH African share and bond markets moved in a volatile manner last week.

The announcement by the US Federal Reserve (Fed) last Wednesday, that it would increase its bank rate by 0.25 basis points to 4.75% came as expected, but the hawkish tone of the Fed chairperson Jerome Powell that more hikes were in store made world financial markets nervous.

The latest increase, however, was lower than the 0.5% at its previous meeting announcement in December.

US equities initially rallied 2% shortly after Powell announced that inflation was expected to ease much lower in months to come. The announcement saw oil prices rally quickly and the dollar depreciate against most currencies.

On Thursday, the rand – after losing initially more than 40 cents after the rate hike announcement to trade at levels weaker than R17.40 to the dollar – recovered strongly to lower than R17. The currency, however, showed big volatility as it depreciated strongly on Friday to R17.37.

On Wall Street, equities lost steam on Thursday and Friday as it became clear that the US non-farm payrolls report for January showed the US economy was creating many more jobs than expected.

The US economy created 517 000 jobs in January 2023, the most since July 2022 and more than double the 185 000 that was forecast. This large improvement in new jobs pushed the US unemployment rate down to 3.4%, the lowest since May 1969.

Together with the average hourly earnings that have increased by 0.3% in January, inflationary pressure in the US will continue.

It seems expectations are that the Fed will continue to raise its bank rate.

The Fed has set a target of 4.2% for unemployment before it can consider halting further rate hikes.

The Dow Jones industrial index ended last week little changed, losing only 245 points (0.008%) after it fell 0.38% on Friday in reaction to the job data. The S&P500 on Friday was 1.04% down, but the index still gained 2% over the week, indicating that US equities rather would strongly recover this year.

On the JSE, lack of fresh economic data, some nervousness on equities on global bourses, and mixed expectations on the State of the Nation Address by President Cyril Ramaphosa on Thursday, have led to volatile and uncertain movement on equity prices.

The all share index ended the week almost flat and lost only 0.33% over the past seven days. The index, however, still hovers above the 80 000 point level (80 241 points) and has gained 9.85% since the beginning of the year.

It seems currently that the load shedding by Eskom has not had meaningful effect on the all share index. After Stage 4 to 6 load shedding was introduced regularly, the index – over the past six months – has shot up by 17%.

Most of the shares on the Top40 and all share indices earn most of their earnings outside South Africa and remain indifferent to domestic geopolitical events. The Top40 index has actually already increased by 10.64% since the beginning of the year..

The US inflation and interest rates, and Europe and China’s recovery will continue to influence movements in South Africa’s equity prices.

Apart from the Sona, investors and analysts will this week look forward to the release of mining and manufacturing production data for December 2022. It is expected that both will be negative, with mining production down by 4.4% (-9.6% in November), and manufacturing output contracting by 2.5% (-1.1% in November).