The tumultuous second half of 2001 was my introduction to financial markets. I started my first job as a fresh-faced graduate on June 1 2001. I knew precious little about financial markets, except to buy Didata, the bitcoin of my youth. The Nasdaq had lost 70% from its peak to the March 2001 trough. The S&P 500 was in a bear market, losing 27% from peak to trough. The rand had lost a quarter of its value relative to the dollar over the course of 2000 into the first quarter of 2001.
Three months into the job, aeroplanes flew into World Trade Centre 1 and 2, and risky assets had another meltdown. The rand tumbled and the local currency continued to bleed as the year progressed. In December, the rand fell out of bed, losing 27% of its value in the 16 trading days to December 20 2001. Bonds went along for the ride and the benchmark yield jumped to 13.6% from 10.1% over the course of three weeks.
I am not sure we ever got to the bottom of why this happened. Explanations ranged from the political meltdown happening in Zimbabwe, the net open forward position, investor concerns about HIV/Aids, the ever-present policy uncertainty, and a few other reasons. All these were not credible then and fall flat as explainers of the phenomenon of rand weakness seen in 2001 to this day.
That year — 2001 — was a study in the unpredictability of markets. The market stress experienced because of the September 11 terrorist attacks could not have been forecast. The one that happened in December could not be explained, and therefore would not have been foreseeable. In September the unthinkable happened, and in December the inexplicable. I learnt early that some of the most important developments in financial markets will not, and in fact cannot, be predicted. Humility is critical and caution advised for those who would engage with the markets.
We have since had the global financial crisis of 2008, the European debt crisis of 2011, the taper tantrum in 2013, the yuan devaluation and commodity collapse of 2015, and the Covid-19 crisis in 2020. Which brings us to the global inflation shock in 2022. Unlike many of the previous market shocks, this one was somewhat predictable, but we probably could not foresee how sharp the shock would be.
Many worried that the US Federal Reserve (Fed) and other central banks had run the printing press too long. This, coupled with fiscal transfers, would predictably lead to high inflation. Some worried that Russia could invade Ukraine. Even fewer thought that Russia’s invasion of Ukraine would elicit the kind of response we saw from Ukrainian nationals and their supporters in the West. I don’t think many would have foreseen that the timing of the conflict would supercharge an already hot inflation cycle.
As is often the case, policymakers must be reactive in the face of the resultant turmoil, and markets react to their reactions. Which brings us to the whiplash we have seen in markets in the past few months. The rand and other risky assets were on a somewhat steady losing streak over much of the second quarter of 2022 after the Fed started with rate hikes in March.
The market found some support after the “dovish” July Fed hike. Investors then lost their nerve, strangely after a lower-than-expected inflation print was released on August 10. Risky assets slid further on the release of Fed minutes in which open market committee members appeared at peace with a weak economy.
The US is running hot from the labour market and inflation perspectives, which suggests there is plenty of room and reason for the Fed to maintain a tightening bias. However, commodity prices are softening, and the US economy is slowing. We are at an inflection point in the Fed’s posture, but these are notoriously difficult to time.
The back-and-forth in sentiment is typical of cyclical turning points. In any case, any number of things could happen yet. As at any other time in markets, humility is critical and caution advised.
• Lijane works in fixed income sales and strategy at Absa Corporate & Investment Banking.
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