Investors are bracing for what could be a turbulent start to the trading week after the JSE lost nearly 3% on Friday in its biggest one-day decline since mid-June, amid deepening fears of a global economic contraction.
Like its peers, the JSE has imploded in recent weeks after central banks, in particular in the developed markets, stepped up their fight against inflation and inflation expectations by normalising their interest rates at a faster rate than initially envisioned.
Investors are growing increasingly anxious that the faster pace of policy normalisation could hurt global economic activity. Central banks in developed markets are only starting to increase interest rates to normal levels after keeping them at record low levels following the Covid-19 pandemic and deflation in the eurozone.
The JSE has lost a whopping 9% in the past two weeks, dragged down mainly by mining shares, which are sensitive to global growth, as well as big industrial shares such as luxury goods maker Richemont.
The gauge of big mining shares tumbled 7% on Friday in its steepest decline since the early days of the pandemic in March 2020 and was 36% below its peak reached in March 2022. Richemont, a big constituent of the SA share market, was almost 12% below its recent high of R198.77, according to Bloomberg data.
Strong dollar
Last week, the US Federal Reserve (Fed) hiked rates by 75 basis points at the third consecutive meeting and indicated that more could be in store as it tries to fend off inflation hovering at its highest level since the 1980s.
“The sell-off is being driven by a very strong dollar and fears that the world will go into recession as governments battle one crisis after another, from energy to the cost of living,” said Gregory Katzenellenbogen, senior portfolio manager at Sanlam Private Wealth. “A sustained turnaround in markets will depend on when the Fed takes its foot off the accelerator and if the rate of change in inflation starts to decrease.”
The Fed aims to bring inflation back to its 2% target from 8.3% in the year to end-August.
Lower growth
“Inflation around the globe remains at multiyear highs and forecasts continue to be revised up, as shown in the IMF’s latest projections, which have inflation for advanced economies averaging 6.6%, and 9.5% for emerging markets,” FNB economists said in a note.
“To slow inflation, central banks have tightened monetary policy, and this will likely result in lower economic growth outcomes, which is what some regard as a necessary consequence,” they said.
The hiking cycle comes at a time when the economy in China is reeling from its stringent approach to dealing with Covid-19 cases.
As the world’s largest consumer of commodities, China has been one of the growth engines for the world economy over the past two decades.
The slowing growth in the country has hit metal prices hard, with iron ore prices falling from highs of $235.46 per tonne in May 2021 to $95.58 on Friday.
The platinum price, which is sensitive to growth in Europe in particular, has fallen from $1,305/oz in February to $859.64/oz.
Commodities
Commodity prices have also been hit by a strong dollar, which is trading at its highest level against a basket of currencies. The strong dollar makes commodities priced in the US currency expensive for buyer holding weaker currencies.