MONDAY MARKETS: Rand under pressure: Politics? Load shedding? US interest rates?
The rand depreciated last week to its lowest level since May 2020, during the Covid-19 lock down, when the currency reached R18.57 to the dollar.
On Friday, the dollar traded on R18.24 to the dollar at one stage. The currency closed on R18.08 on Friday afternoon. This is 32 cents weaker over the past seven days since the President’s State of the Nation Address (Sona). The rand, however, improved against the UK pound and traded 7c stronger over the same seven days on R21.67 on Friday. Against the euro, the rand lost 16c over the past seven days and traded on Friday at R19.23. The dollar continues to win field against the British pound and the euro.
The greenback has strengthened strongly over the past few months as the US Federal Reserve hiked interest rates at each of its meetings. It remains hawkish as the US inflation rate stays around 6.4% and US jobs data indicates that wages continue to rise and the US unemployment rate is now the lowest since 1969.
The US dollar index that measures the currency against a basket of other currencies has risen already by 17% since the beginning of the year. Against this stronger dollar the rand only depreciated by R1.02 to the dollar, or 7.3% over the same time. Therefore, relative to other currencies, the rand performed very well. Once again it is wrong to assume that the geopolitical situation as well as load shedding are the main reasons for the weaker rand.
On the JSE, stocks continue to move stronger.
The JSE All Share Index traded above the 80 000 point level again last Thursday and at one stage tested the 80 400 level, the highest level over the last year.
For the week, the index has improved by 0.4% and is 8.52% up for the year to date. Resources again are moving sideways, gaining a mere 0.34% since the beginning of the year, and lost 4.3% over the past seven days as the prices of especially metals such as gold and platinum came under pressure. The price of gold lost 1.2% last week.
Given the weaker-than-expected retail numbers for January (-0.6%), as well as the remarks by the Monetary Policy Committee (MPC) of the SA Reserve Bank that the South African economy will grow by almost nothing this year (0.3%), industrial and financial shares came under pressure. The Industrial 25 index was down by 1.6% since the Sona, whereas financial shares remained flat last week after they rocketed since the beginning of the year, gaining 16,47%. Financials are more in demand given the current higher interest rates and expectations for further hikes in the repo rate at the next two meetings of the MPC.
The dollar strength in reaction to higher inflation in January than was expected (6.4% against 6.2%), is not so good for US stocks, bonds, real estate and cryptocurrencies. The S&P500 index, however, has improved by 6.4% since the beginning of the year, but is moving currently sideways to lower in anticipation of the Feds next step and the release of its minutes of the last meeting this coming week.
This coming week, investors and analysts will await the Minister of Finance’s annual Budget speech on Wednesday.
The most-asked question around the Budget are as follow: What the growth expectation of government for 2023 is, as it will determine tax income. What will be the deficit to gross domestic product (GDP)? What will the debt to GDP be, and what are the plans for Eskom and other state-owned enterprises? Will the government subsidise a part of the increase of the 18.7% rise in electricity prices and will it borrow money for that? What is going to happen with the fuel levy and civil servants’ salaries?
South Africa’s producer price inflation rate (PPI) for January will be released on Thursday.
On global markets the publishing of the minutes of the Fed’s meeting in February on Wednesday will set the tone for global markets this week. The announcement of the US GDP economic growth rate for quarter four (second estimate) on Thursday will also draw attention. US weekly jobless claims and gas and oil reserve data will also be of note. US personal income and spending data for January are to be announced on Friday. Elsewhere, Japan and Canada will release their inflation rates for January.
Chris Harmse is the consulting economist of Sequoia Capital Management
BUSINESS REPORT