JSE, rand fall amid fears of a global recession

CIPS 23 September 2011

JSE, rand fall amid fears of a global recession

Near-term outlook for currency gloomy as most emerging market currencies plunge against dollar

THE rand has fallen more than 10% against the dollar over the past week, while South African stocks dropped the most in 16 months yesterday after the carnage in global markets.

Concern over the state of the global economy has morphed into outright panic as comments from the US Federal Reserve on Wednesday failed to allay fears.

Most emerging market currencies plunged against a resurgent dollar yesterday as investors piled into safe-haven investments such as US and Japanese bonds following growing unease over Europe’s sovereign debt crisis and the US’s stuttering economy.

These factors have put global economic recovery from the 2008 credit crisis in jeopardy. SA has not been exempt, with second-quarter growth hitting a two-year low.

The rand has been the worst performing of the 18 emerging market currencies tracked against the dollar by Bloomberg this week. At R8,27/$ in late afternoon trade yesterday, it was at its weakest level since the end of May 2009.

"I’m afraid that if global markets continue to behave like that then there’s still some more room to go for rand weakness," Bartosz Pawlowski, head of foreign exchange for Central and Eastern Europe, the Middle East and Africa at BNP Paribas in London, said yesterday.

On Wednesday, the US Fed announced that it would implement what it called "Operation Twist". The bank said it would buy $400bn of bonds, with maturities of six to 30 years, until end-June to replace shorter-dated debt.

However, the plan failed to calm investor nerves, and the Fed’s gloomy warnings on the US economy spooked them further.

"In the medium term, I still see a lot of value for the rand as terms of trade have improved considerably since pre-2008, but the near- term outlook is unfortunately gloomy," Mr Pawlowski said.

Further accelerating the rand’s decline was the liquidation of its positions among Japanese investors, he said.

This week, the rand — the seventh-most-traded emerging market currency — weakened 11% against the Japanese yen.

Against the pound it fell 8% in a week, and 7,8% against the euro — which represents about a third of South African trade.

The rand "may face further stiff headwinds in the weeks ahead", Absa Capital said in a note yesterday.

Yesterday, South African shares suffered their worst one- day sell-off since May last year, as investors preferred safer assets over riskier equity markets.

The JSE all share index fell 3,2% to its lowest level in more than a week.

The slump was in line with a sell-off in European stock markets, as shares slumped to a 26- month closing low yesterday. US stocks also suffered a brutal sell- off. with the Dow down 3,51% and the S&P and Nasdaq both losing ground last night.

Due to concern over the effect on demand as the world readied itself for a protracted slowdown, industrial commodity prices took a massive hit yesterday, with copper, platinum and aluminium prices sinking lower.

Gold plunged to a four-week low, while silver tumbled the most since October 2008. Both metals are regarded as safe-haven bets, and normally rally in times of uncertainty.

"Gold prices are pretty much irrelevant at this stage, the reason behind declines is probably unwinding of some leveraged positions, like everywhere else," Mr Pawlowski said.

The rand’s strongest level this year against the dollar, R6,56/$, was reached at the end of April, the level now being a 26% drop.

SA’s inflation rate of 5,3% has been pushed up by higher food and fuel prices, as well as by administrative prices.

Central banks in Turkey, Brazil and Switzerland have cut their interest rates to support economic recovery.

Oil prices tumbled nearly 4% yesterday. Brent crude traded down $4,36 to $106 a barrel by 5pm, after dropping to $105,30 a barrel earlier — the lowest level since August 22.

"If the rand stays at these extremely weak levels it will have a massive impact on maize and wheat prices," Brink van Wyk, a commodity trader at Bushveld Grain, said yesterday.

SA is a net importer of wheat and net exporter of maize . The higher prices farmers can get for their maize on international markets automatically lead to a spike in local prices. White maize is up 56% this year, while yellow maize — used in animal feed — has gained 48%. Global wheat prices have been 24% lower, but a weaker rand increases costs locally.

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