Global markets recovered after renewed United States and Iran tensions rattled investors, but experts warned South Africa remains exposed to higher oil prices, inflation and rand weakness if the conflict escalates.
Image: CN-STR / AFP
Global financial markets regained some composure on Thursday after the sharp sell off triggered by renewed military tensions between the United States and Iran, with investors turning their attention to strong corporate earnings and slightly easing oil prices.
Although concerns remain over the security of shipping through the Strait of Hormuz, markets appeared less convinced that the latest military action would develop into a prolonged escalation.
Neil Wilson, Saxo UK Investor Strategist, said investors had become more measured in their assessment of the geopolitical risks.
"The shooting continues but oil prices have eased and stocks have made a modest advance. Although the US struck Iran for a second day the market is yet to see this as a major reescalation," Wilson said.
He added that comments from US President Donald Trump suggested Washington could be looking for a diplomatic exit.
Oil prices, which had surged following the renewed conflict, also retreated from recent highs.
"Crude broke out about 7% to tap on $80 and test the 200 day moving average which is acting as a resistance level. Prices have backed off to around $77,50 on Thursday morning, shaking off some of the geopolitical premium from the initial spike," he said.
Despite lingering uncertainty, investor sentiment improved across several major equity markets. Citadel Chief Investment Officer George Herman said locally, the direct impact of higher oil prices will be on fuel prices in South Africa.
"Our fuel prices are averaged over a 1-month period, so there’s some lag before fuel prices are hiked. Up to yesterday, we still had an over recovery, so the immediate impact gets muted. Markets adapt to inflation expectations immediately and repriced within hours of the resumption of hostilities," Herman said.
"That’s because it’s assumed that the oil exporters are forced to sell gold in their reserves to keep their cashflows going. Up to now, the rand has actually been very resilient as the fiscal numbers and credit upgrades boosted sentiment. Further extension of hostilities will dramatically undermine the tailwinds for the rand," Herman added.
Herman said that markets have become dangerously blasé about the conflict as Trump’s mood and decisions changes faster than the Cape Town weather.
"Markets have been slow to react to news which increases the risk of shocks over the medium term. Hope of a lasting solution needs to remain, otherwise the bad-case scenario of the conflict, where oil prices rise beyond $140 as inventories become depleted and inflation becomes unhinged, starts becoming real."
According to Anchor Capital, the JSE All Share Index climbed 1,5% to 111 960.40, recovering strongly as the second quarter earnings season began in the US with encouraging corporate results and investors reacted more calmly to the renewed tensions.
Technology stocks led local gains, with Naspers rising 7,8% and Prosus advancing 6,7%, while retailers, gold miners and platinum miners also posted strong gains.
The positive mood was mirrored internationally. The S&P 500 gained 1,1%, the Nasdaq advanced 1,3% and the Dow Jones Industrial Average rose 1,2% as Wall Street welcomed strong earnings from major financial institutions.
Anchor Capital warned that shipping insurers now regard the Strait of Hormuz as unsafe for unescorted commercial vessels following Iranian tanker attacks and retaliatory US strikes.
Brent crude traded at $76.84 a barrel during early Thursday trade after easing from Wednesday's highs before recovering later in the session to around $78.42 a barrel. Gold strengthened to $4 140 an ounce as investors continued to seek protection from geopolitical uncertainty.
"The rand remains in cautious terrain, trading at R16.38 to the dollar, R18.72 to the euro, and R21.95 to the pound," Citadel Global MD Bianca Botes said.
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