South African markets opened the week on the back foot yesterday as the rand weakened to a one-month low, while the JSE benchmark index fell to its weakest in three weeks.
This comes as a string of hawkish remarks from US Federal Reserve officials stressed the need to keep raising borrowing costs to get ahead of inflation.
St. Louis Fed Bank president James Bullard said he was considering support for a third consecutive 75-basis point rate hike in September, saying he was not ready to say the economy had seen the worst of the inflation surge.
This could filter down to the South African Reserve Bank, which raised the key repo rate by 75 basis points last month and signalled further aggressive monetary tightening as inflation topped 7.4 percent in June, the highest since May 2009.
As a result, the rand weakened to R17.09 to the dollar, the lowest since July 21, before closing at R17.01 by 5pm.
The rand was hurt by hawkish Fed comments, softer international commodity prices, with disappointing economic data from major economies, and reinforced global recession fears, lifting the dollar.
The US dollar has consequently strengthened, buoyed also by increased safe haven flows into the US, weakening the rand against the greenback.
Investec chief economist Annabel Bishop, however, said there was also an element of outright rand weakness, which has occurred on investors increasing their switch out of risk assets.
Economic growth forecasts have become more negative across the board as the risk of global recession is seen to have risen, while slower global growth was seen as a possibility, particularly on higher interest rates due to inflation concerns.
A surprise fall in retail sales and the continued weakness in both the mining and manufacturing sectors through to the end of June also cemented expectations that South Africa's economic activity will shrink in the second quarter and drag overall 2022 growth.
Bishop said financial markets were adjusting to these communications and data releases, with inflation expected to fall in the second half of the year, perhaps even slightly quicker than expected, but not to return to target by year end, which has heightened market concerns.
“Market players worry that central banks will be too harsh, hiking interest rates so that economies slow very sharply, risking or causing the global economy to fall into recession, and with the US the world’s largest economy, it has yet to allay these concerns,” Bishop said.
Meanwhile, the JSE All Share Index fell more than 1 percent to around 68 800 points early yesterday, the lowest since August 4, tracking its global peers amid ongoing risk aversion.
The losses in the JSE were led by mining stocks as gold prices declined to an over three-week low of $1 735 (R29 128) an ounce as the risk-off sentiment dented bullion demand.
This came on the back of the benchmark index losing 1.4 percent last week, dragged down mainly by basic material and financial stocks.
However, oil prices have offered a reprieve to the markets after the price of Brent crude fell more than three percent to below $94 per barrel as traders considered the prospect for more Iranian supply following US President Joe Biden’s discussions with European allies about reviving the 2015 nuclear deal.
BUSINESS REPORT