South African stocks and currency markets began the week by following their global counterparts as the market sentiment was dented by worries about a rise in Covid-19 cases in China and tightening restrictions amid the expected domestic interest rates hike.
The JSE All Share Index fell 0.9% yesterday to 71 938 points while the rand moderated to R17.33, 9c lower, against the US dollar after weakening to R17.46 during early trade.
China reported its first deaths of Covid-19 patients in nearly six months yesterday as the country struggles to contain a surge in cases across multiple cities.
The country’s National Health Commission reported two deaths of Covid-19 patients in Beijing for Sunday, following the death of an 87-year-old man in the capital on Saturday.
As a result of China’s tough zero-Covid strategy, the world’s second largest economy is implementing a variety of lockdown measures to contain the virus.
This has disrupted global supply chains, spooking investors who have fled to safe haven currencies such as the dollar.
TreasuryONE currency specialist Andre Cilliers said yesterday that the Covid-19 spike in China had soured risk sentiment.
“A record daily spike in Covid cases in China has turned risk sentiment negative as fears of stricter lockdowns weigh on markets,” Cilliers said.
“Currency, commodity and equity markets are mostly weaker. The dollar is further supported by fears of an escalation in the Russia-Ukraine conflict as well as the continuing hawkish stance of the Fed.”
The rand has not reacted materially even to the positive outlook given by S&P Global on Friday as the ratings agency left South Africa’s sovereign debt rating unchanged in junk status.
S&P said the positive outlook reflected its expectation that a net external creditor position, a path toward fiscal consolidation, and the implementation of some structural reforms could lead to an easing of fiscal and economic pressures.
It did, however, warn that it could revise the outlook to stable if external or domestic shocks subdue South Africa’s economic growth over the forecast period, or if fiscal financing or external pressures increase significantly.
Investec chief economist Annabel Bishop said yesterday that the implementation of stage 5 load shedding had also weakened the rand as Eskom ramped up its power cuts. There is also growing expectation that the SA Reserve Bank (SARB) will hike interest rates by another 75 basis points at its Monetary Policy Committee meeting on Thursday amid sustained risks around the inflation outlook, including a softer rand exchange rate.
SARB Governor Lesetja Kganyago said recently that South Africa still has space to raise interest rates, citing the need to get inflation expectations more anchored around the midpoint of its target range of 3%-6%.
Headline consumer inflation is set to ease slightly from the 7.5% recorded in September.
“The rand remains vulnerable to global risk sentiment as well, while domestically markets are tending towards a 75 basis points instead of a 100 basis points hike this week, which is also weakening the rand,” Bishop said.
“The US has hiked interest rates by 100 basis points more than South Africa has, and the erosion of the interest rate differential between the two countries has weakened the rand, as has dollar strength on rising risk aversion globally.
“South Africa retains a high risk premium, which afflicts the rand negatively as well.”
BUSINESS REPORT