Johannesburg - The oil price dipped below $28 per barrel on Wednesday and that blew all the optimism behind Tuesday’s rally on world markets out of the window. Markets worldwide dropped sharply and major indices on the JSE were more than 2% down at midday on Wednesday.
Analysts said there is currently a tug of war between technical investors looking for a rebound on the premises that the markets have dropped too far, and nervous pessimists who think the worst is not over for the global economy. Currently the pessimists are winning hands down.
Tuesday’s technical rebound was supported by expectations that the Chinese authorities might do something to support the flagging Chinese economy, but the rally petered out on Tuesday afternoon on Wall Street, after another negative report by the International Monetary Fund on the world’s growth prospects.
Commodities slumped, with the oil price dropping below $28 per barrel. Asian equities tumbled to a three-year low with Chinese shares in Hong Kong at their lowest levels since the depths of the global financial crisis. Japan’s Topix index entered a bear market and major European markets were all more than 3% lower.
It was therefore no surprise that the All-share index at midday was already 2.68% lower at 46 360 points with the Financial, Industrial and Resources indices all dropping sharply. The Top 40 index traded 2.84% softer at 41 655 points.
This means that the All-share index is now already about 8% lower for the year, one of the worst starts to a new year ever. Wall Street was also about 8% lower over the first two weeks and the FTSE index in London about 7% down.
Technical analysts regard the performance of the market over the first month of the year as an important indicator of what will happen for the rest of the year.
The Resources index was again the biggest loser, trading 4.22% lower, while the Financial index lost 2.98% and the Industrial index 2.33. Gold rebounded as usual in uncertain times and the Gold index improved 1.65% after the gold price rose to $1 0933 per fine ounce.
The local market was also hurt by news that South Africa's annual consumer price inflation increased to 5.2% in December 2015, the highest rate for the year as consumers battle with increased food and fuel prices and interest rate hikes.
The rout on world markets started on Tuesday when the IMF cut its world growth outlook, highlighting weaker prospects for commodity-producing nations and risks tied to the Federal Reserve’s exit from ultra-low interest rates.
Analysts said the root of the problem is still the imbalance of oil supply and demand. Therefore until oil price moves calm down, the stock market will struggle and a genuine rebound is unlikely. Indications are that the latest report on US stockpiles will highlight an even bigger oversupply.
The mood was also darkened by the International Energy Agency's warning that the market "could drown" in oversupply as key producer Iran - freed from years of global sanctions - resumes exports of the commodity.
Sasol’s [JSE:SOL] share price was negatively influenced by the weak oil price and traded 4.94% lower at R359.18. Sasol’s income from synthetic fuel is determined by the oil price, but the share price dropped only 4.74% over the previous seven days as that income is hedged by the weak rand. The lower oil price also hurt emerging market currencies and the rand dropped as low as R16.95 to the dollar before it recovered to R16.86.
BHP Billiton [JSE:BIL] was 6.12% softer at R139.48 after the company said on Wednesday that it sees no recovery in iron ore or coal prices in the next few years, while holding out hope for a rebound in copper and oil.
Kumba Iron Ore [JSE:KIO], South Africa’s major iron producer, was 6.51% softer at R25.15, giving up the previous day’s gains. Its holding company, Anglo American [JSE:AGL], lost 7.19% to R53.48 and is now almost 30% lower over the past month.
In the industrial sector Naspers [JSE:NPN] gave up 5.61% to trade at R1 798.71. It was announced that Tencent, the Chinese internet giant in which Naspers holds a stake of 34.15%, backed Meituan-Dianping, a Chinese group-buying service, to raise $3.3bn at a higher-than-expected valuation of $18bn, making the company one of the country’s biggest internet startups. Alibaba Group Holdings is also a partner in the startup.
Richemont [JSE:CFR] lost 3.06% to R102.81 and British American Tobacco [JSE:BTI] dropped 1.97% to R838.75.
Standard Bank [JSE:SBK] was the busiest share on the JSE at midday in terms of volume, and the share lost 2.52% to trade below R100 a share at R98.02. FirstRand [JSE:FSR] was 1.75% softer at R39.70.