THE MARKETS ON MONDAY COLUMN: The uncertainty over how a new government of national unity will look, the new Cabinet, Speaker of the National Assembly and the role of the MK and the EFF in the future government, brought jitters to South Africa’s financial markets, writes economist Chris Harmse.
THE UNCERTAINTY over how the new government of national unity (GNU) will look, the new Cabinet, Speaker of the National Assembly and the role of the MK and the EFF in the future government, brought jitters to South Africa’s financial markets last week.
Market nervousness was enhanced on Wednesday when Statistics South Africa announced that the economy shrank by -0.1% during quarter one 2024. This is the fifth negative growth quarter since quarter three 2021, at the height of the Covid-19 pandemic.
After the release of the US non-farm payrolls on Friday, indications are the US Federal Reserve will have a later-than-expected start to lowering its Bank rate. Despite the nervousness, the shares and bond markets held steady at their previous week’s levels, with the rand depreciating only marginally.
Public opinion played the key role in the low voting outcome for the ANC. The public mostly voted against the ruling party over the lack of service delivery and elevated levels of poverty and unemployment. Public opinion, however, now seems to be split in two.
On one hand, some of the public believe that a closer coalition between the ANC and the DA will boost “white monopoly capital” even further, which will increase the skew distribution of income and could even lead to the scrapping of minimum wages and the current grants.
On the other hand, some believe a GNU to the right of the spectrum – with the ANC and DA as well as other parties such as the IFP, PA, the FF and even Action SA – will address the realities of the South African economy rather than parties putting their own ideologies and manifestos first.
These two “schools of thought” lead to uncertainty in the rand exchange markets and foreign portfolio flows into South Africa’s equities.
The news that the US non-farm payrolls for May 2024, released last Friday, were worse than expected from a US interest rate cut perspective, also contributed to the rand exchange rate, and share prices on the JSE remained under pressure.
The US economy created 272,000 new jobs last month, much more than the expected 182,000 and the 165,000 new jobs that were created in April 2024. Although the unemployment rate (4.0%) is higher than expected (3.9%) the sharp increase in the annualised hourly earnings by 4.0% suggest that US demand inflation is likely to remain high. This is bad news for expectations of a rate cut by the Federal Reserve at their next meeting this coming week.
On Wall Street, US shares did not react strongly on the job numbers. All three main stock indices on Friday were almost unchanged at the close. For the week, the S&P500 index gained almost 1.0% and is 12.74% higher in dollar terms since the beginning of the year.
In reaction to the above two main events, the rand/dollar exchange rate depreciated strongly after the release of the final elections results last Monday, from R18.56 to the dollar to R18.96 on Thursday, before the US job data.
On Friday, in reaction to the speech delivered on Thursday evening by President Cyril Ramaphosa, indicating that the national executive council of the ANC fully supports a GNU, the rand appreciated back to R18.85 on Friday evening.
On the JSE, the All Share Index absorbed the two above uncertainties. The index traded almost flat over the week, ending 108 points (0.1%) higher.
The Financial board, as a proxy for domestic economic and geopolitical factors, managed to gain some ground last week. The FIN15 index improved by 0.5%. The All Industrial Index also stood its ground, winning 1%. The job data in the US had a devastating effect on precious metal prices on Friday.
The gold price dropped $70 (R1,324) and ended the week just above $2,300. The platinum price also traded $70 lower for the week. In reaction the Resource10 index lost 4% over the last five days.
This week, financial markets in South Africa will be dominated by details on how the new GNU might look. Parliament must hold its first session within 14 days of the results’ release (June 18, 2024). The Members of Parliament must be sworn in, and they will elect a president from among the four hundred members.
On Tuesday, Statistics South Africa will release the manufacturing figures for April, and on Thursday the April mining production data.
Movements on global markets this week will be dominated by the release of the US core inflation rate on Wednesday, which is expected to be only marginally down, from 3.6% to 3.5%, as well as the interest rate decision by the US Federal Reserve’s Open Market Committee (FOMC), which will be released on Wednesday.
Given the wage increase data that were announced on Friday, it is expected that the FOMC will keep its repo rate unchanged at 5.5%. The tone of the Fed chairperson Jeremy Powell’s speech, however, will set market sentiment.
Elsewhere the UK will announce their latest unemployment rate data and its gross domestic product economic growth rate. China will also announce its inflation rate for May on Wednesday.
* Chris Harmse is the consulting economist of Sequoia Capital Management and a senior lecturer at Stadio Higher Education.
– BUSINESS REPORT
