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Johannesburg - The debate on the future trajectory of US interest rates was reignited on Friday by better-than-expected news on the US labour market, with negative consequences on Monday for the JSE and the value of the rand against the dollar.
Higher bond yields in the US and in South Africa have stopped Friday’s run on the JSE in its tracks and most indices were again lower by midday on Monday.
At that stage the All-share index was 0.54% lower at 51 418 points and the Top 40-index lost 0.52% to 45 756 points. The resources sector was 0.84% lower and the Industrial index lost 0.40%, but the Financial index traded 0.21% higher. The Gold index lost 1.025% but was still above the 1 000-points level, trading at 1 025 points.
Higher US interest rates, and ultimately US bond yields, can lead to an outflow of money from the stock and bond markets of emerging markets back to the US, where the risks are perceived to be lower – and this is a possibility currently discounted by South African share prices and bond yields.
The prospect of higher interest rates in the US also supported the strong dollar, with devastating effects for rand value. On Monday morning the unit was trading at levels fluctuating between R12.62 and R12.55 per dollar.
READ: Rand recovers some poise on Fitch fillip
A weak rand is supposed to support the share prices of companies which earn most of their income abroad in dollars, as was the case on Friday when the All-share index closed 0.75% higher. But the selling pressure was again too big on Monday morning and some of Friday's star performers gave most of their gains back in morning trade.
The US Labour department announced on Friday that the world’s biggest economy created a surprise 280 000 jobs in May, better than expected. The US stock market did not respond much to the news, but US bond yields spiked and moved beyond the important level of 2.4%.
The technical analysts of Imara SP Reid said in their daily Market Snapshot that US bond yields are clearly contemplating higher interest rates in the months ahead. It seems the market is ignoring International Monetary Fund MD Christine Lagarde's plea for the US not to raise interest rates before next year, because of the damage it can do to emerging markets.
Fitch brings rate relief
There was some good news for the local market when Fitch Ratings announced late on Friday that it was keeping South Africa’s international credit rating intact, at two levels above junk status. Many analysts expected a downgrade. A credit rating below investment status means that South Africa will have to pay more for loans.
READ: Fitch affirms negative outlook for SA economy
It can also lead to an outflow from the South African bond market, as many financial institutions are not allowed to invest in bonds of a country whose credit rating is below investment status. It seems the bond market is already discounting such a possibility and this also put a damper on share prices, which have lost about 8% of their value over the past two months.
All eyes are now on Standard & Poor's which will announce their latest assessment of South Africa’ s credit rating on Thursday. Their rating is already lower than that of Fitch, at just one level above junk status.
Friday’s run on the JSE was due to the market being oversold, which offered bargain hunting opportunities. Imara SP Reid on Monday said the market is still oversold, but it seems the selling pressure is too big at the moment.
The Top 40-index, which includes most of the big double-listed shares popular with foreign investors, is still below the crucial resistance level of 45 800 points which must be breached soon to regain momentum. The next one after that is 46 729 points.
Some of the big resources shares which benefited on Friday from the weak rand - which dropped as low as R12.71 for a dollar - gave up these gains on Monday morning. Kumba [JSE:KIO] and Sasol [JSE:SOL] were both more than 3% higher on Friday, but Kumba lost more than 5% on Monday to R160.91 and Sasol was 2.15% lower at R423.78. BHP Billiton [JSE:BIL] traded 1.87% softer at R250.95.
Among the big industrials Naspers [JSE:NPN] gained 0.38% to R1 830.85 and SABMiller [JSE:SAB] 0.24% to R646.8. The two giants in the Rupert stable were both lower. British American Tobacco [JSE:BTI] traded 0.94% softer at R652.20, and Richemont [JSE:CFR] lost 0.07% to R104.70.
