By Dr Chris Harmse
Most equity markets experienced a glimpse of a strong recovery last Monday and Tuesday.
On the JSE the ALSI improved by 3.0% last Tuesday alone, following global share bourses, while the rand exchange rate also seemed to start its recovery.
The gold price also recovered sharply during the middle of the week, reaching levels higher than $1712 on Thursday. On Wall Street, the Dow Jones Industrial index gained 5.5% last Monday and Tuesday. A mixed bag of reasons drove equity markets during the beginning of last week.
The US 10 Treasury yield dropped sharply from 4,0% to 3.64% (lower yields normally pushes equity prices higher).
Investors felt that stock markets are over-sold, and sentiment started to turn in favour that the US Fed will be less hawkish and abstain from further aggressive bank rate hikes.
Unfortunately, in a month where equities normally tend to move bearish, and fears of more cost pressure on the US inflation rate after the September job data, equity prices on Wall Street turned around sharply last Thursday and Friday as investors turned to more reliable assets like gold and the $US.
It seems that they are starting to lose hope for a fourth-quarter comeback, despite that year-end rallies are historically stronger in midterm election years. The Dow Jones lost steam after the high on Tuesday but still managed to end the week 2.0% higher.
The negative sentiment was fuelled further after the US non-farm payrolls for September have shown that the unemployment rate came down from 3.7% to 3.5%, suggesting that scarcity in the job market pushes up wages and therefore cost-push inflation. Analysts and investors now once again fear an aggressive stance by the Fed that can see further sharp interest rates hikes the rest of the year.
The Dow Jones industrial index lost 630 points (2.11%) on Friday alone.
On the JSE most indices also followed the initial rally at the beginning of last week. The ALSI rallied by 4.1% last Monday and Wednesday, managed to move sideways for the rest of the week and only lost 0.24% on Friday.
For the week the index still gained 3.1% as resources and metal stock prices remain bullish. The Resources 10 index gained 9.5% over the week. The rand exchange rate followed the same pattern. After moving much stronger during the first part of last week, with the currency improved from R10.07/$ to R17.64/$, but also lost steam and started to depreciate strongly last Thursday and Friday and traded on R18.02/$.
This coming week Stats SA will release the manufacturing production data for August on Tuesday, as well as the mining and gold production (August) on Thursday.
On global markets investors’ attention will turn to the release of the US Fed FOMC minutes of their September meeting on Wednesday, followed by the release of the US inflation rate for September on Thursday.
It is expected that the increase in the US CPI was marginally lower on 8.1% than the 8.3% published the previous month (August.) The UK will announce its unemployment rate for August this coming Tuesday.
On Friday it is the turn of the release of the US retail sales for September.
* Chris Harmse is an economist at CH Economics (Pty)Ltd and lecturer at the School of Commerce at Stadio University.
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