Rand, JSE hit after China sets off jittery markets

China was once again at the centre of the action as SA assets endured a torrid start to the trading week, with the rand falling to a three-week low and the JSE slipping to its weakest level since January.

The rand, often a barometer of investor sentiment towards emerging markets due to its status among the most heavily traded currencies outside those of developed nations, also dropped on Monday ahead of the Federal Reserve’s policy meeting later this week. Fed policymakers may outline the pace at which they will scale back crisis-era stimulus. That may support the dollar at the expense of higher-yielding alternatives.

For the stock market, the biggest driver was a selloff in China as a liquidity crisis at property developer Evergrande Group threatened to spread beyond the sector, raising concern about growth prospects in the world’s second-largest economy, which is a key customer for the commodities produced in SA.

In recent weeks, SA stocks have been hit as a crackdown by China on the technology sector caused a slump in Naspers, Africa’s most valuable company.

The rand dropped as much as 0.98% to R14.8615/$, the weakest level since August 27, before being 0.3% weaker at R14.7633 by 5.20pm. It has fallen in each of the past five days, its longest losing streak in a month.

For the year to date, the local currency is down 0.9%, making it one of the more stable emerging-market currencies as it benefited from the superior yields on SA bonds relative to developed-market peers.

The JSE all share fell as much as 3.1% to its weakest level since January 5, before ending 2.2% lower. The industrial metals index dropped just over 3% and banks fell 1.9%.

EVERGRANDE

US stocks fell more than 1% at the open on Monday, with the S&P 500 dropping the most in a month. The UK’s FTSE 100 was 0.8% lower shortly after the close of SA ’ s markets, while Europe’s Stoxx 50 index fell 2%. Hong Kong’s Hang Seng fell to its lowest level since May 2020 as Evergrande dropped about 10%.

Commodity prices, which surged in the second half of 2020 partly due to supply concerns and a rebound in global economic activity, were weaker after Chinese Premier Li Keqiang indicated that the country would use “market tools” to stabilise prices, said Jeffrey Halley, a senior market analyst at currency trader Oanda in Singapore.

“I am assuming that means releasing more commodities onto domestic markets from China’s strategic reserves.”

Higher commodities helped shield SA markets even as the economy suffered its deepest slump in a century due to Covid19 and associated lockdowns. That helped keep the rand stable, which has reduced the risk of inflation accelerating, enabling the SA Reserve Bank to keep the official interest rate at the lowest level in about five decades.

While investors do not expect the Fed to start its tapering as

soon as this month, “there is very high sensitivity to any indication of when it will start”, Investec chief economist Annabel Bishop said in a note.

Nick Kunze, senior portfolio manager at Sanlam Private Wealth, said the Fed may send a signal that it is ready to start reducing the $120bn-a-month stimulus programme as early as November.

“Whatever comes out of the Fed meeting will have long-term repercussions for the US dollar that will reverberate all the way to the rand,” he said.

Traders will also be on the lookout for the SA central bank’s monetary policy committee (MPC) meeting, which concludes on Thursday.

The median prediction of 19 economists surveyed by Bloomberg is for the repo rate to stay at 3.5%, where it has been since July 2020.

Governor Lesetja Kganyago and other members of the MPC have consistently emphasised their willingness to support the economy through historically low interest rates, while their forecasts show that inflation is likely to stay near the midpoint of their 3%-6% range.

THE FED MAY SEND A SIGNAL THAT IT IS READY TO START REDUCING THE STIMULUS PROGRAMME AS EARLY AS NOVEMBER