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JSE in limbo on downgrade fears

Johannesburg - The JSE was in limbo on Tuesday morning on fears of another downgrade of South Africa’s credit rating, which also punished the rand on Monday. As a result the All-share index, which reached a new high on Monday, traded only modestly higher.

The rand, which dropped sharply to R13.22 on Monday afternoon, was steady on Tuesday at R13.24 to the dollar, but shares which normally benefit from a weaker rand hardly moved on Tuesday morning.

By mid-morning the All-share index, which closed at a new all-time high of 55 203 points on Monday, was only 0.09% higher on a new high of 55 257 points. The Top 40 index, which includes most of the dual-listed shares which are normally supported by a weaker rand, was only 0.15% stronger at 48 945 points.

The market was spooked on Monday by a critical report on the South African economy by ratings agency Moody’s, which will review its rating of South Africa next week.

Moody’s said the South African Reserve Bank’s decision to lower interest rates might help the economy, but investors are more concerned about the rating agency's suggestion that the recent interest rate drop might be the result of political pressure, indicating that it considers the independence of the Reserve Bank to be in jeopardy.

Moody’s also warned that structural problems in the South African economy will hamper future growth.

There are fears are that Moody’s might decide to downgrade the credit rating of government bonds issued in South Africa to junk status (the present downgrade only affects South Africa bonds issued abroad).

If that happens and other rating agencies follow Moody’s example, South Africa might be removed from the global index of government bonds, which could lead to a massive outflow of capital with disastrous results for the rand.

Financial shares would be most affected by such a downgrade and the Financial index at mid-morning was 0.43% lower. The Industrial index was only 0.24% up despite higher global markets which support dual-listed shares, while the Resources index gained 0.43%, backed by a weaker rand.

Standard Bank [JSE:SBK], which reached a 52-week high of R164.73 last week, shed 1.15% to R161.84. FirstRand [JSE:FSR] was 1.41% softer at R51.13.

Barlays Group Africa [JSE:BGA], which has announced a drop in income and earnings due to the depressed economy, traded 1.56% softer at R142.34. The group said its South African retail subsidiary Absa reported a decline of almost 300 000 customers with transactional accounts.

Naspers [JSE:NPN], the driving force behind the Industrial index which pushed the All-share index to a new high on Tuesday, reached yet another all-time high. The share price gained 0.53% to R2 923.25 and before Tuesday’s trade was already 44.1% higher for the year to date.

Investors in British American Tobacco (BAT) [JSE:BTI] shrugged off the news that the group faces a formal probe by the UK’s Serious Fraud Office, following reports that it bribed African government officials to influence tobacco legislation.

At mid-morning the stock was 0.98% higher at R833.31. BAT said on Tuesday it is running its own investigations, via external legal advisers, into allegations of misconduct.

Retail shares were among the busiest, following news that Pick n Pay [JSE:PIK] has cut 10% of its staff, eliminating about 3 500 jobs as the group grapples with South Africa's technical recession. Investors responded positively to the group’s firm action to make the business more competitive and the share price gained 1.64% to R64.21.

Pick n Pay, which employs about 35 000 people, said the cost of retrenchments will weigh on its profits in the six months to end-August. 

The Foschini Group [JSE:TFG] traded 1.56% lower at R149.32 but Mr Price [JSE:MRP] shed only 0.06% to R173.02.

Glencore [JSE:GLN] set yet another 52-week high when it traded 1.96% stronger at R59.17, after the share gained more than 26% over the past 30 days.


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