In a week when there was a lack of economic data as financial markets waited for the release of the US non-farm payrolls on Friday, the sudden downward grading of the US sovereign debt by Fitch on Wednesday caught equity markets by surprise.
Although the US Treasury Secretary Janet Yellen on Wednesday slammed the move by Fitch Ratings to strip the US of its top-tier credit rating, calling it “flawed” and “entirely unwarranted”, investors evaluated the Fitch move as reasonable and a wake-up call to the US government to address its massive debt levels and the uncertainty around the debt ceiling.
Equity prices across the world tumbled, while the dollar strengthened, and gold and oil prices decreased.
On Wall Street, the Dow Jones industrial index lost more than 2.0% since last Wednesday and ended the week down by 1.13%, while the S&P500 lost 0.5% for the week, after it had surged by more than 3.0% during the first two days before the Fitch announcement.
The market awaited the US non-farm payments for July that were released on Friday afternoon, South African time. The previous month (June) the US unemployment rate remained at 3.6% as the economy added jobs and much more than expected.
The market forecast that in July the jobless rate would once again move sideways on 3.6%. The report, however, indicates that 187 000 new jobs were added in July and that the unemployment rate had in fact decreased to 3.5%.
Although this is good news, suggesting that the US economy is not heading for a recession, share prices tumbled on Friday on the back of indications that another interest rate hike by the Federal Reserve next month is becoming more certain.
The Fed targets an unemployment rate of 4.2%, as a target, before it may start to ease interest rate hikes. It argues that inflation must come back to 2.0% (currently on 3.0%) and, given that the US economy likely will not go into a recession, there is still room for a 12th interest rate hike.
This negative outlook is likely to remain as the inflation rate data to be announced this week does not look good.
On the JSE, equity prices followed the rest of the world and trickled down on the news of the Fitch downgrading. The all-share index lost 2.5% last week and is now down more than 4.0% over the past two six months.
Industrials did a bit better and ended last week 0.16% higher and are now up by 3.5% in the past six months, and still higher by 18.6% for the year.
The FIN15 index moved sideways last week and lost only 0.4%. The index is now trading 4.1% for the past six months and is still 11.0% up for the year.
Resources are the main loser this year. The Resources 10 index traded down by a massive 5.7% last week, is now down by 19.6% over the past six months and 14.7% for the year-to-date.
The rand exchange rate continues to weaken, since the aggressive negative speech by EFF leader Julius Malema last week, as well as the Fitch announcement and the “negative” US non-farm payrolls movement.
The currency depreciated by 4.3% (80 cents) against the US dollar during the week and ended Friday evening on R18.46 against the dollar. The rand is now down by 7.0% since the beginning of the year.
On the capital market, the All Bond Index traded sideways last week, but is still 4.68% higher over the past six months.
This coming week, financial markets await the release of the US oil stocks data on Wednesday. Oil stocks in the US were depleted by 1.3 million barrels last week, pushing crude oil prices to higher than $86 (R1 537) per barrel.
On Thursday, the US will announce its inflation rate numbers for July. It is expected that the US inflation rate increased to 3.1% in July from 3.0% in June, after it decreased from 3.7% in May.
The core inflation rate (that the Fed uses for interest rate decisions) is expected to have remained at 4.8%.
The UK will announce its gross domestic product economic growth rate for quarter two on Friday.
Domestically, Statistics South Africa will release South Africa’s latest mining production data for June on Wednesday.
Chris Harmse is the consulting economist of Sequoia Capital Management.
BUSINESS REPORT