MARKETS ON MONDAY: US Fed minutes and greylisting horrible for rand and equities

The hawkish stance of all the members of the US Federal Reserve had a devastating effect on global stock markets and currencies last Thursday and Friday.

“Almost all participants agreed that it was appropriate to raise the target range of the federal funds rate 25 basis points,” said the minutes of the Fed, which were released last Wednesday. The minutes also indicated that, “participants generally noted that upside risks to the inflation outlook remained a key factor shaping the policy outlook, and that interest rates would need to move higher and stay elevated until inflation is clearly on a path to 2%”.

The US annual inflation rate slowed only slightly to 6.4% in January of 2023 from 6.5% in December, less than market forecasts of 6.2%.

The minutes effected equity markets negatively on Thursday and Friday. The dollar exchange rate appreciated by 2.4% against a basket of currencies since the middle of last week, as it is expected that the Fed would raise its bank rate by at least 0.25% at their next meeting in March.

On Wall Street, US stocks moved negatively last Thursday and Friday after the Fed’s minutes were released. The Dow Jones industrial index lost 3.2 % last week and of it 2.4% was during last Thursday and Friday.

Most other equity markets followed suit. In the UK, the FTSE 100 lost 1.2% last Thursday and Friday, the DAX index in Germany traded down by 2.1% for the two days and in Hong Kong the Hang Seng index lost 2.1%.

On the JSE, the all share index and the rand initially welcomed Finance Minister Enoch Godongwana’s Budget speech last week as he did not increase one of the mayor taxes and forecast that the government’s deficit to gross domestic product would be halved from 6.2% to 3.1% over the next three years.

The rand against the dollar exchange rate appreciated just after the speech from levels close to R18.30 to as low as R18.07.

The all share index also surged 1.07% higher on Wednesday after the speech.

But the combination of the Fed’s minutes that was published on Wednesday evening and the greylisting of South Africa’s financial compliance by the Financial Action Task force (FATF) of Friday had let to a sharp decrease in most shares last Thursday and Friday and the all share index on Friday.

On Thursday the all share index lost 2.6% and in line with most other indices across the world. For the week, the index lost almost 3.0%. The rand exchange rate depreciated with 42 cents against the dollar last week, to close Friday on R18.42.

The FATF already on October 1, 2021 published its report on South Africa’s money laundering and counter terrorist financing measures expressing its concerns. The FATF assessed 40 recommendations that countries should strive toward combating money laundering and terrorist financing.

In its report, published on Friday, the FATF concluded that South Africa adhered to only 17 of the FATF technical recommendations. And was totally non-compliant with three of them. This is painting a dire picture of South Africa’s ability to safeguard its financial flows in terms of international standards.

One must ask the question of whose responsibility it was to look at these recommendations and change South Africa’s compliance accordingly? Is it the government, the SA Reserve Bank, or the financial sector as a whole? It seems that the South African Financial Intelligence Centre had to reverse the process.

South Africa now has only one year to become compliant. If a country is on the list, then the political and economic risks of doing business with that country becomes high for other countries. The same is true for private financial institutions who are not compliant.

Meanwhile, this week investors and analysts will await the release of South Africa’s unemployment rate for quarter four 2022 on Tuesday. It is expected that South Africa’s unemployment rate has increased from 32.9% to 33.3% due to the negative effect of Stage 6 load shedding that has been introduced on a regular basis since September 2022.

Total new vehicle sales for February data will be published on Wednesday. It is expected that the figure came down from 45 000 units in January to 43 500 units in February. Higher interest rate financing in South Africa is starting to show. Various Purchasers Managers Indices (PMI) will also be announced this week.

On global markets the publishing of US durable goods orders for January will set the tone for the week. US non-farm-payrolls will not be released this coming Friday as is custom.

And on Friday, March 10, various countries will release their economic growth rate numbers for quarter four 2022 as well as the annual rate during this week. These countries are Canada, India, Australia and Italy. The EU as well as several European countries will release their latest inflation rate figures during the week.

Chris Harmse is the consulting economist of Sequoia Capital Management.

BUSINESS REPORT