The fallout from escalating US import tariffs reverberated across global markets on Monday as fears of trade tensions between the United States and China grew, with South Africa's economy bearing the brunt of the turmoil exacerbated by domestic political uncertainty.

The rand plunged to a near two-year low by 2.4% to R19.57 against the US dollar by 5pm on Monday, its lowest level since 26 May 2023 when it hit R19.65/$1, worsened by the uncertainty over the future of the Government of National Unity (GNU).

Financial markets remained on edge on Monday over the outcome of the ANC National Working Committee, which met to decide on the constitution of the GNU, after the DA disagreed with the VAT increases proposed in both the budgets.

Investec chief economist, Annabel Bishop, said the recent substantial US dollar weakness would have seen the rand nearing R17.50/$1, but its weakness above R19.00/$1 was driven by domestic factors alone due to high political risk.

“Without the threat of the DA exiting the GNU and hence the government of South Africa, the rand would be substantially stronger, well below R18.00/$1 after the imposition of universal tariffs from the US, with many countries seeing higher protectionism,” Bishop said.

“The rand will likely weaken past its prior weak point of R20.00/$1 on a DA GNU exit. The rand would likely head towards R21.00/$1 immediately and then weaken to beyond R22.00/$1 depending on the new partners of the GNU, with the sudden shock to financial markets, and worries over a left-shift in economic policy.”

Markets around the world were also grappling with a wave of volatility, spurred by the ongoing trade war instigated by US President Donald Trump’s hefty tariffs.

The Hang Seng sank 13% and Nikkei closed almost 7% lower. US futures also pointed to 3% decline.

As tariffs increase and retaliatory measures ensue, the prospect of a global recession looms larger in the minds of economists and investors.

Analysts have warned that should the trade conflict continue to escalate, it could lead to a substantial slowdown, stifling growth and impacting imports and exports crucial to the South African economy.

Bastian Teichgreeber, chief investment officer of Prescient Investment Management, said if the US economy fell into a recession, there will most likely be a follow through with economies like China or Europe, and eventually other developed markets like South Africa since the US is the engine room of the global economy.

“So we would expect the economy in the States to do significantly weaker and we can track that already with our indicator set. And with that, the odds of a global recession are definitely also on the rise,” Teichgreeber said.

“So from an economic point of view, things are changing quickly here. And it is on the back of Trump's policy, which has not been good.”

The intensity of the sell-off on the Johannesburg Stock Exchange (JSE) reflected these fears as stocks experienced their steepest decline this year on Monday.

The JSE All Share Index plummeted by 4.9% to 77 493 index points during early trade, its lowest level this year down from the all-time highs above 90 000 points, before pairing losses and rose above the 80 000-points mark late in the afternoon.

The losses were across the board, with industries, commodities, and financial indices all trading on the backfoot.

Peter Armitage, CEO and co-chief investment officer at Anchor Capital, said Trump’s tariffs have resulted in a severe equity market meltdown at a pace faster than the start of the COVID-19 pandemic in early 2020.

However, Armitage cautioned that investors should not be crystallising losses, saying the market had not reached a point for major decisions as the events and market reaction were only a few days old.

“We seldom recommend selling into panic, which is precisely what is happening in the markets. For investors who are underweight equities, some shares are reaching attractive levels, but we would wait for things to bottom out in a market, which could well be in a short-term freefall,”Armitage said.

“Actual market levels started the year at high valuations and, even after this drop, are not cheap in aggregate. Equity markets were not pricing in much room for error, and investors are now moving quickly to correct that – that process is not an exact science and can often overshoot in the short term. We would advise patience in these volatile times.

“At a time when markets could swing up or down by 10%, making definitive calls is an impossible task. Unlike many market routs in recent decades, this situation is entirely “man-made” and self-inflicted. This means that a change in policy or direction could see markets bounce back just as quickly – nobody can predict the very short-term outcome. What we can do is better understand the context.”

BUSINESS REPORT

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Escalating US tariffs send SA market into tailspin amid political uncertainty