JSE loses out on emerging markets run

Johannesburg - The JSE traded lower again on Wednesday morning, with the local market failing to benefit from a run in emerging markets.

With the dollar under pressure as expectations of a rise in Federal Reserve interest rates receded after weak U.S. economic data, money is pouring into emerging markets which touched their strongest levels since July 2015 as investors sought higher yields.

The local stock market did not benefit from that run in emerging markets. Although the rand traded almost 2.5% stronger at R14.02 to the dollar, major indices on the JSE were mostly lower as a strong local unit is negative for the big rand hedge shares, which represent most of the bourse’s market capitalisation.

A firm rand is normally good for financial shares, but they were also lower on concerns about weak economic growth which could lead to a downgrade of South Africa’s credit rating. This could be disastrous for local banks as it would increase their cost of funding.

By midday the All-share index was 0.3% lower at 53 500 points and the Top 40 index had lost 0.52% to 46 763 points. The big loser was the Industrial index which gave up 0.59%, while the Financial index was 0.50% lower. Resources were barely in the black and the Gold index gained 0.71% on a higher gold price.

The dollar fell 1% against several major currencies on Tuesday after Institute for Supply Management data showed activity in the U.S. service sector slowed to a six-and-a-half year low in August, diminishing already slim prospects for a Federal Reserve rate hike this month.

Investors also bet the soft U.S. data, which followed weaker-than-expected jobs numbers on Friday, would pressure the European Central Bank to ease monetary policy further. The ECB meets on Thursday.

"When people think there's no immediate rate hike from the Federal Reserve, then Asia and emerging markets are the place to go to, as investors seek yields," said Toru Nishihama, senior economist at Dai-ichi Life Research.

In Asia, MSCI's main Asia-Pacific stock index, excluding Japan, was up 0.2%, having earlier touched its highest level since July last year. This helped to lift MSCI's all-country world index to its highest since level August 2015.

European shares were slightly softer, led lower by banking shares as banks face difficult circumstances if interest rates drop even further. The Stoxx 600 index nonetheless remained close to eight-month highs.

Compared to this, the All-share index moved only 0.86% over the past 90 days and is still 2.4% below the 52-week high of 54 609 points set in May this year. The index is however 7.6% higher than a year ago.

Statistics South Africa announced that the local economy grew 3.3% in the second quarter, which surprised on the upside and helped avoid a recession; however, economists are pessimistic about future prospects. Economists expect growth of only 0.2% for the year and very slow growth over the next five years.

Slow growth is detrimental to banks, but not all share prices in the sector were hammered. FirstRand [JSE:FSR] lost 0.3% to R46.66 and Standard Bank [JSE:SBK] was only 0.19% lower at R159.17, but Nedbank [JSE:NED] shed 3.53% to R211.28 and Barclays Africa [JSE:BGA] was 2.41% softer on R149.10. in early trade Nedbank was more than 4% down and Barclays Africa more than 3%. The top banks have now lost all their strong gains over the past month.

MMI Holdings [JSE:MMI] was the biggest loser in the financial sector, shedding 3.56% to R24.14 after it announced disappointing results. The company said fiscal full-year profit dropped 25% after underwriting slumped and investment returns declined. Core earnings per share, which exclude one-time items and other adjustments, fell to R2.03 from R2.44 a year earlier, missing the R2.24 median estimate of four analysts surveyed by Bloomberg.

The company announced plans to improve efficiencies to combat poor difficult conditions.

Old Mutual [JSE:OML] traded 0.11% lower at R37.46 and Sanlam [JSE:SLM] lost 0.55% to R66.26.

Naspers [JSE:NPN] fell victim to some profit-taking and lost 0.97% to R2 502.72. British American Tobacco traded 0.07% lower at R901.02.

The reduced expectations of a rate hike in the US also lifted other commodities. Copper hit a two-week high at $4 683 a tonne, but Glencore’s [JSE:GLN] share price was still 0.03% softer at R35.65.

Gold hit a two-and-a-half week peak above $1 352 an ounce before pulling back. AngloGold [JSE:ANG] was the busiest among the top gold shares and gained 2.45% to R250.51.