Global markets had largely rebounded by the end of last week after last Monday’s dramatic market meltdown. That meltdown was a reaction — or overreaction — to a set of data points that were relatively undramatic.
But however brief the meltdown, the reaction signals how febrile global market sentiment is. This may not be over yet. And the environment for emerging markets such as SA remains a challenge.
Last Monday’s sell-off saw the Vix volatility index, which gauges the so-called fear factor, spike briefly to peak at 65, a level surpassed only in the early Covid days and at the height of the 2008-09 global financial crisis.
There were at least three triggers. One was Japan, whose central bank recently implemented a surprise interest rate hike — the first in decades. That shifted the value of the yen, which weighed on the value of Japan’s stock market. It was the hardest hit of the major markets last Monday, with Tokyo’s Topix index plummeting by 12%.
More important, the hike disrupted the big carry trade: investors had been borrowing in yen at zero interest rates to invest in assets that gave them a higher yield. The move in the yen dented that, forcing many traders to liquidate their positions speedily.
The fall in tech stocks was a second trigger. Doubts about artificial intelligence have been creeping into the market for a while, particularly about the demand for the semiconductor chips produced by the likes of Nvidia. Relatively muted results from the largest tech companies in recent weeks tended to fuel concerns, in a market in which the tech stocks had been trading at stratospheric values.
But the trigger that really fuelled the Monday meltdown was the US economy. A year or two ago everyone had been talking about a possible US recession. It was feared this hard-landing scenario would be the price the economy would have to pay to bring down spiralling inflation rates. Instead, the Federal Reserve has managed to get inflation down without constraining the US economy much at all. With employment staying strong and the economy still motoring along and well on the way to a soft landing, investors had become complacent.
It did not take much to puncture the complacency. Disappointing US jobs numbers on August 2 showed only 114,000 jobs were created in July, with the US unemployment rate rising from 3.4% to 4.3%. South Africans can only dream of such numbers of course, but in the US they set off a wild reaction. The Fed decided again last week to hold off on cutting interest rates. The fear was that it had finally left it too long, at the risk of plunging the economy into recession. The prospect of a hard landing returned. All it took was that one jobs data point which, as it turned out, did not necessarily indicate that the labour market was weakening.
So overblown was the fear factor that for a day or two some expected an emergency Fed meeting. That would simply have sparked more panic and the Fed was never going to do that. But markets are now pricing in a 100% chance of a September rate cut. The question is whether the Fed will cut by just 25 basis points or go for 50. It may even cut twice more by the end of this year.
That should make life particularly interesting for SA’s own monetary policy committee, which will have to make its September decision just before the Fed makes its announcement. As in the US, the market is now fully pricing in a September rate cut by the Reserve Bank. With SA’s inflation heading down towards the 4.5% midpoint of the target range, inflation expectations moderating, and the market’s election fears switching into post-election optimism, the Bank will find it hard to justify anything other than a rate cut. The question will surely be how much.
Meanwhile, that post-election optimism helped to ensure that SA was hit much less hard than it usually would have been by the global market meltdown and the risk aversion that came with it. As JSE CEO Leila Fourie pointed out last week that the JSE all share index fell by much less than the MSCI emerging markets index on Monday, and has outperformed the index year to date.
SA is also benefiting from a stronger rand and a revival of bond market inflows. That will help to support rate cuts, which will support SA’s economy, along with continued progress on growth-boosting reforms. SA just has to sustain that progress — and to hope that global market conditions stay friendly.
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