More of the same: Financial markets remain nervous about AI stocks

Many pensioners and investors in South Africa over the last two weeks became nervous and worrisome as share prices on the JSE moved weaker. Pessimistic views of an expectation of a strong and downward correction in equity prices surfaced amongst the public.

Goldman Sachs CEO David Solomon warned this week of a “likely” 10-20% drawdown in equity markets at some point within the next two years, while the International Monetary Fund and the Bank of England have both sounded the alarm bells. One almost gets the impression that the old saying of greed of the last ten months is quickly replaced by fears of big losses. Long-term strategies are quickly forgotten as asset prices undergo healthy corrections and adjustments.

As uncertainty prevails on the next step for interest rates both in South Africa and in the US, the JSE underwent a week of fluctuating sentiment, that range between fear/caution at the beginning of the week, a strong rebound by Thursday, just to remain negative again on Friday. These patterns were driven mostly by weaker resources stocks as the price for precious metals see-saw through the week.

Overall, the week experienced a change in market psychology. Even though fund managers and market commentary have indicated that South African equities remain inexpensive to offshore investors and will continue to attract greed rather than bargain hunters, short-term caution was replaced by buying interest by last Thursday only to be reversed on Friday as fear driven sentiment pushed share prices down.

The uncertainty that sparked these fluctuations was noticeable in the All Share index on the JSE. The index closed on Monday at 109 080 points or only 163 down on last week’s close. The ongoing government shut down in the US, the sell off AI shares on Wall Street and a sharp decrease in the Gold and other precious metals prices led to the see saw movement.

On Tuesday, the all share index lost 1.6% or 1700 points, only to recover sharply again from Wednesday to close above 110 100 points on Thursday, gaining 2 305 points or 2.05%, but tapered Friday again with -1 254 (1.1%) to end the week on 108 846. This is a -397 or 0.3% loss for the week.

The Gold price also experienced nervous fluctuations. Bullion started last week at $3 997 per ounce, dropping to $3 932 per ounce on Wednesday, only to close higher again on Friday at $3 996 and the same price as a week ago. Despite some nervousness in the foreign exchange market, the Rand holds steady against the dollar , ending Friday on R17.29/$ against the R17.32/$ close the previous Friday. Against the UK pound the Rand also remained flat the week on R22.78/£ and strengthened by 9 cents against the Euro to close on R20.00/€.

US stocks slipped for the first time in four weeks. Equity prices in the US were negative last week. The major indexes recorded their first weekly loss in four weeks as technological shares continued to weigh on sentiment. The S&P 500 dropped 1.63%, the Dow Jones Industrial Average fell 1.2% and the Nasdaq Composite slid 3.04%. Fears of an artificial intelligence share price bubble surfaced as ongoing concerns over stretched valuations, has thrust contagion fears into the spotlight for global investors.

Prospects for this coming week

This coming week alle eyes will be on the South African unemployment rate for quarter three that will be released on Tuesday. It is expected that the jobless rate will come down to 32.7% from the 33.2% level in quarter two. This better rate supports expectations that the South African economy is recovering and should grow at 1.0% in 2025, against the 0.3% advance in 2024. Statistics South Africa will also release the manufacturing data for September on Tuesday with the expectation that it will increase by an annual 1.0%, against the annual decline of -1.5% in August.

Mining production data for September will be released on Thursday. On global markets investors, analysts and economists awaits the release of the US inflation rate for October on Thursday. It is expected that the annual increase in the CPI will be 3.0%, as well as the core inflation rate also at 3.0%. Due to a lack of US unemployment data due to the US government shut down, it remains uncertain whether the Federal Reserve will lower its bank rate again at its next meeting in December.

Chris Harmse is the consulting economist of Sequoia Capital Management and a senior lecturer at Stadio Higher Education.

*** The views expressed here do not necessarily represent those of Independent Media or IOL.

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