JSE-listed mining shares are on track for their best performance in months in November, with AngloGold Ashanti and Kumba Iron Ore surging 31.6% and 34% so far this month, indicating just how quickly market sentiment can change from one extreme to the other.
Mining stocks and the JSE in general have had a topsy-turvy year, with the all share hitting a high in March before unravelling as the reality caught up with investors that Russia’s invasion of Ukraine was going to hit global growth.
The war in Ukraine worsened inflation in developed markets in particular, prompting central banks such as the US Federal Reserve to normalise their interest rates at a much faster pace than expected. The hike in interest rates strengthened the dollar to the detriment of commodity prices. This makes commodities priced in the US currency expensive for buyers holding weaker currencies.
Markets have been edgy about growth prospects in China for months, given its stringent approach to managing the Covid-19 pandemic through lockdowns.
Inflation trajectory in the US does, however, appear to have plateaued, but is still a long way away from the Fed’s 2% target. US consumer inflation rose at an annual 7.7% in October, slowing from 8.2% in September.
But markets, which are inherently forward looking, took the October US consumer inflation as a sign inflation had peaked, meaning the Fed might slow the pace of its tightening.
The gold price has shot up 7.2% to $1,750.40/oz since the start of the month as the dollar retreated from its multi-decade highs, while the iron ore price hovered at $92 per tonne on Friday, up from its lows of $78.91 at the end of October, though it was still off its highs of $135.82 touched in early June, according to Bloomberg data.
“We remain sceptical that the recent rally marks the start of a new market regime. The priority of the Fed is likely to remain the fight against inflation, pending a more consistent stream of softer prices and employment data,” said Mark Haefele, chief investment officer at UBS Global Wealth Management in a note.
“Against this backdrop, we favour adding to defensive assets in both equity and fixed income markets.”
Central banks find themselves in the invidious position of having to bring inflation under control without necessarily hurting growth.
The pickup in commodity prices has boosted JSE-listed miners, with Anglo American up 19.2% to R663.99 this month, though it is relatively flat year to date. Harmony Gold and DRD Gold are up 22% and 21% this month.
The rally in mining shares has bolstered the JSE all share index, which is up just shy of 10% over the same period, with large industrial shares also providing a boost.
“There has been a change in sentiment because the Fed might be reaching the peak in its interest rate cycle as there are early indications that inflation has peaked. This has been good for risk assets,” said Greg Katzenellenbogen, portfolio manager at Sanlam Private Wealth.
“At the same time China has started to make noises about easing the lockdowns and taking steps to help its property market and lowering reserve ratios for banks. This implies demand might pick up and that’s good for commodities. The jury is still out whether this is sustainable but it explains why commodity shares have started to recover.”
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