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Johannesburg - The sharp drop in the value of resources and gold shares on the JSE over the past month continued unabated on Monday, morning when the Resources index again lost more than 5%.
The Resources 10 index has now lost more than 24% of its value over the last month and at its current level of only 24 892 points is more than 33% softer than the 41 773 points it achieved at the beginning of the year.
Resources shares have been under pressure for the whole year due to low commodity prices as a result of a weaker Chinese economy, but the losses were intensified over the past month by a very strong dollar after it became clear that the US Federal Reserve will most likely raise interest rates later this month.
A strong dollar is bad for commodity prices as it becomes more expensive for buyers who have to pay for commodities in other currencies.
The sharp drop in commodity shares also pulled the overall market lower, despite steady gains by the Industrial and Financial indices. By midday the All-share index was 0.03% lower at 51 623 points and the Top 40 index was barely in the black at 46 378 points, only 0.11% higher than on Friday. The Industrial index traded 0.66% stronger while the Financial index gained 0.31%.
Analysts said on Monday morning this week will be crucial for determining the future direction of the dollar (and the commodity sector). The European Central Bank is forecast to boost monetary stimulus and the Fed gets its last chance to scrutinise US payroll data before its interest rates meeting later this month.
Fed chair Janet Yellen will also appear before Congress this week, which will give valuable pointers on the future direction of interest rates and the dollar. Futures traders are continuing to buy dollar instruments amid speculation that the Fed will raise rates next month.
There are however investors who are increasingly questioning how much further the US currency can strengthen after appreciating almost 10% this year. Societe Generale SA’s Kit Juckes wrote in a client note on Friday that the currency is overvalued by some measures.
Investors in commodity shares were also spooked by another drop in Chinese stocks after Friday’s sharp fall. The Shanghai Composite Index was at one stage as much as 3.2% lower after a 5.5% loss on Friday, despite unprecedented efforts by the government to prop up share prices.
Three of the biggest commodity groups on the JSE, BHP Billiton [JSE:BIL], Anglo American [JSE:AGL] and African Rainbow Minerals []JSE:ARI], all set new 52-week lows on Monday. BHP Billiton, which was initially more stable than the other commodity groups, is now dropping fast and lost another 5.09% to a new low of only R165.13. The share lost 30.3% of its value in the year to date, of which more than 22% was lost over the past 22 days.
Anglo American, which is more than 55% lower for the year to date and 32.15% over the past 30 days, dropped another 3.24% to R84.47. Anglo is one of the worst-performing shares in the FTSE 100 index on the London Stock Exchange.
African Rainbow’s new 52-week low of R42.58 means the stock is now 61.54% lower than at the beginning of the year.
Imara SP Reid said in its daily Market Snapshot that resources shares will at best offer “trading opportunities” rather than exhibiting evidence which encourages long-term investment. The long-term nature of commodity cycles clearly suggests that immediate and sustainable upside is unlikely.
Kumba [JSE:KIO] was a clear example of trader activity on Monday morning. The share gained 10.75% over the past seven days due to bargain hunting, but gave almost everything back when it lost 9.98% to R45.90. Kumba is now 78.7% lower for the year to date, with more than 34% of this lost over the past 30 days.
The Gold index was also lower and traded 3.12% softer at 856 points. The index, which started the year on 1 124 points, lost almost a third of its value in the year to date and before Monday’s losses was 17.5% lower than a month ago.
There were however also shares which reached new 52-week highs, including British American Tobacco [JSE:BTI] which gained 0.88% to a new record of R846.05. Mondi Plc [JSE:MNP] was 0.98% higher on a record of R330.21 and Mondi Ltd [JSE:MND] 0.69% stronger on a high of R329.76.
The share price of fashion retailer Truworths International [JSE:TRU] did not react to news that it has entered into an agreement to buy an 88.9% stake in Britain’s Office Retail Group for R5.5bn. Office, a footwear retailer with 150 stores, would be Truworths’ first foray into Europe. The share was only 0.06% higher at R96.07.
