Are financial markets nervous on Cabinet uncertainty?
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Last week demonstrated how fragile and uncertain the first “coalition” government of South Africa will be as the Government of National Unity (GNU) struggled to cross the first main hurdle towards successful co-operation consolidation and fought to reach consensus on a new Cabinet.
Foreign investors did not like this uncertainty and sold South African bonds and some shares on the JSE. In reaction, the rand depreciated last week by 30c against the US dollar to R18.25 at the close on Friday, from R17.95 on the previous Friday, after the president was sworn in.
The currency, however, is still 70c stronger than the beginning of the month (R18.95/$), after the results of the national election was pointing towards the minority of the ANC and the fanatical support for the MK.
On equity markets, the mixed results on the main board of the JSE indicate that it is difficult to determine if the uncertainty on the new Cabinet had any negative effects on equity prices.
The announcement by Statistics South Africa in its latest Quarterly Employment Statistics that total employment decreased by 67 000 jobs during the first quarter of 2024 against the fourth quarter of 2023, also had a negative impact on markets. The main sectors that lost jobs were trade (minus 57 000), community services (minus 18 000) and mining (minus 3 000).
Together with these negative numbers, most global bourses found last week difficult as investors preferred to buy US shares and bonds. In Europe, for instance, the CAC in France was minus 2.3%, The Euro Stoxx 50 was down by 0.35%, The FTSE 100 in the UK traded down by minus 0.9%, and in Australia the S&PASX200 index decreased by minus 0.4%.
Against these two “negative” movements the JSE appeared to perform well, but mixed among the different sectors. This is due to the political and economic uncertainty.
The all share index last week ended flat, losing only 16 points (minus 0.02%) over the week, to 69 707 points. The level is still 0.5% higher than the day of the election and gained 6.0% over the past past months. Against this, the financial sector (as a proxy of domestic geopolitical sentiment) lost almost 5% last week given the Cabinet saga.
Given a surge in commodity and precious metal prices, including gold, platinum and palladium, the RES10 index shot up 4.4% last week. On the industrial board, the all share industrial index traded weaker by 3.1% last week, losing minus 0.95% since the election results were announced.
This coming week, domestic markets will await the release on Wednesday of the S&P global Purchasers Managers Index (PMI), as well as the Absa Manufacturing PMI for June. Also on Wednesday, the new motor vehicle sales for June will be announced.
On Friday, the Bureau of Economic Research will release its inflation expectation figure for quarter two. The inflation expectations in South Africa decreased to 5.33% in the first quarter of 2024, down from 5.69% in the fourth quarter of 2023.
Movements on global markets this week will be dominated by the release on Friday of the US non-farm payrolls for June 2024. The main indicators that investors and analysts await are the US unemployment rate (expected to remain on 4%) and the annual average hourly wage rate (expected to have increased to 3.6%, down from 4% in May).
These expectations do show some improvement, but will still not be enough to change the current stance of the US Federal Reserve to drop its bank rate at their next meeting in July.
The release on Wednesday of the US Federal Open Market Committee minutes of its previous meeting will also be of note, especially its effect on the rand-to-dollar exchange rate. Most countries across the globe will also release various PMIs for May during this week.
Chris Harmse is the consulting economist of Sequoia Capital Management and a senior lecturer at Stadio Higher Education.
BUSINESS REPORT