SHARE indices over the world continued their downward correction last week. The geo-political tension in Ukraine that started last Monday, as well as the reality of a soaring interest rate cycle, contributed to a second consecutive week of large selling of risky assets, such as shares, on the global markets.
Ukraine political tension also contributed to a further hike in oil prices, as the price for Brent oil traded higher than $90 (R1 403) per barrel last week. The potential escalating military conflict between Nato and Russia send stock markets in a frenzy last Monday.
The UK FTSE lost £53 billion (R1.1 trillion) last Monday and European markets tumbled 3.8 percent, their biggest drop in one day in 18 months. The UK blue chip index ended last Friday 1.09 percent lower for the day after it had recovered during the week as the threat of a Russian invasion of Ukraine started to subside.
In the US, the Federal Reserve confirmed at its Federal Reserve Open Market Commission (FOMC) meeting on Wednesday that it would start to hike its bank rate in March and stop its bond purchases at the same time.
The sharp increase in the US inflation rate from 0.5 percent at the beginning of 2021 to 7 percent in December 2021 fuelled the decision of the FOMC to tighten the US spending belts for the rest of the year. Fears of at least three consecutive rate hikes during the year had led to volatility on Wall Street, after last week’s big sell-off of especially tech stocks listed on the Nasdaq board.
Wall Street moved volatile and uncertain last week in the light of the Ukraine invasion threat and the FOMC announcement of a rate hike in March. The three main indices, namely the Dow industrial index (0.5 percent), the S&P500 (-0.5 percent) and the Nasdaq (-0.1 percent), ended the week flat but had recorded big losses from the beginning of the year of -4.5 percent, -7.2 percent and -12.5 percent, respectively. All three indices, however, recovered strongly on Friday as strong earnings from Apple Inc boosted sentiment that US earnings are still strong and alive.
The news last Thursday that the Monetary Policy Committee (MPC) of the Reserve Bank had increased the repo rate by another 25 basis points to 4 percent came as no surprise. Given that South Africa’s inflation rate continues to increase and currently stands at 5.9 percent, just underneath the MPC’s upper target rate, fears of stronger CPI increases in the months to come, as well as to protect the value of the rand, the MPC had no choice but to increase the repo rate. The higher repo rate automatically pushes the commercial banks’ prime rate up by 0.25 percent to 7.5 percent.
Negative global sentiment last week as well as the increase in the repo rate by the MPC and the press release of the FOMC suggesting higher US interest rates in March led to volatile movements on the JSE. After sharp falls at the beginning of the week, shares improved last Thursday but ended flat on Friday.
The all share index ended the week 1.8% lower and for the month of January traded down by -0.3 percent. Industrial stock continues to move negatively with the Industrial 25 Index losing 3.6 percent last week and it is down by -4.7 percent year to date.
Given the sharp decrease in metal prices such as gold (-$40 per ounce) and platinum (-$30 per ounce) last week, the Resources 10 Index started to lose momentum as it traded down by -1.2 percent last week. The index, however, had gained 4.4 percent for January to date.
Financials traded positive last week, despite the repo increase and the weaker rand. The Fin 15 Index gained 1 percent. Listed property, however, continued to trade lower on the back of the 0.5 percent increase in the repo rate over the past three months. The JSE SAPI lost 0.6 percent last week and already trades -4 percent down for the year.
The rand depreciated strongly on Friday. Against the dollar the currency lost 30 cents for the day and traded 46c weaker for the week on R15.59. Against the pound the rand lost 31c last week, trading at R20.89 and against the euro depreciated with 22c last week and traded on Friday on R17.38.
Looking ahead, this coming week South Africa’s IHS Markit Purchasing Managers Index (PMI) for January will be released on Wednesday. On global markets the announcement of the US non-farm payrolls for January on Friday will dominate financial markets. Most other developed countries will also publish various PMI indices. The Bank of England as well as the European Central Bank will announce their interest rate decisions on Thursday.
Dr Chris Harmse is an economist at CH Economics