The global markets grappled with significant challenges, erasing earlier optimism for a bullish turn in the last quarter of the year. September saw a resurgence of investor fears, driven by surging bond yields reaching multi-year highs. This highlights the underlying difficulties in the global financial system. Notably, there are growing concerns about a recession in Europe, particularly in Germany, the region's largest economy, which is experiencing negative growth from key indicators.
A more important factor was the higher oil prices have reignited inflation concerns, defying earlier beliefs that interest rates had peaked. This surge in oil prices is closely linked to a tight global market, where supply-side challenges persist amidst robust demand. Currently, both U.S. and global oil inventories are at year-on-year lows, reflecting anticipated healthy demand. However, this demand is met with suppressed supply due to extended cuts by Saudi Arabia and Russia. Additionally, the rising risk of a U.S. government shutdown led to a sharp pullback in stocks in the latter half of the month.
Global Equities Face Headwinds
The MSCI All-Country World Equity Index experienced a significant decline, doubling from the previous month to a 7.11% drop. This decline affected both emerging and developed markets. Concerns loom over central banks' persistent focus on inflation, potentially destabilizing financial markets. The data supports the notion of a prolonged period of higher inflation, consequently leading to likely interest rate adjustments. Rate-sensitive stocks bore the brunt of this sentiment.
Looking Ahead: Potential Volatility in Store
As we enter the last quarter of the year, trading activity typically escalates, ensuring an engaging period for investors. While October has witnessed historic market crashes, statistically, this month tends to favor a bullish trend for stocks. The Treasury market will remain in focus following September's fresh multi-decade highs in rates. Additionally, energy and currency markets could exert a substantial influence on stocks. News developments of good news will be bad news for stocks as it encourages the idea that the economy can take on more interest rates.
Global Macroeconomic Landscape: Signs of Weakening Demand
The global macroeconomic stage shows evident signs of weakening demand, largely influenced by central bank's efforts to combat inflation. The manufacturing sector is experiencing contraction, services are decelerating discreetly, and credit availability is noticeably contracting. Commodities and industrial metals are hitting lower lows. Europe grapples with elevated inflation, weakened manufacturing activity, tightening credit conditions, and renewed central bank assertiveness, particularly affecting key growth areas such as Services PMIs, construction PMIs, Retail Sales, and sentiment surveys.
China's Economic Challenge: Rebalancing Growth
China, a pivotal player on the global stage, has experienced a shift in its economic dynamics. The anticipated growth engine effect on global growth has receded. The transition from goods to services in developed markets has added pressure on Chinese manufacturing activity. This trend is particularly evident in the steady year-to-date downtrend across industrial metals. While easing Chinese monetary policy has shown signs of stabilizing the macro economy, a solid recovery remains elusive.
China's trade surplus shrank to $68.36 billion in August 2023, marking the smallest surplus since May. This decline is attributed to a more significant drop in exports compared to imports, reflecting persistent weak demand both domestically and abroad. Considering the first eight months of the year, the trade surplus stands at USD 553.4 billion, with exports declining by 5.6% and imports falling by 7.6%.
US Economic Landscape: Treading Cautiously
The U.S. economy finds itself in a precarious position. The decision by the U.S. Fed not to raise interest rates in the last meeting led to an unexpected surge in yields, bolstering the dollar. While the job market remains a stronghold with above-trend creations, the tough interest rate environment has spurred more individuals to rejoin the labor force, causing a 3.8% rise in unemployment.
Manufacturing activity is finally showing signs of improvement, albeit in a state of contraction. The Manufacturing PMI was revised higher to 49.8 in September 2023, with output increasing at a marginal pace, the fastest since May. However, job creation remains moderate, and new orders continue to decline, reflecting the impact of high interest rates and inflation on consumer demand. Meanwhile, the service sector has seen a slight narrowing, despite global weaknesses in industrial production.
Locally:
In September, the Johannesburg Stock Exchange (JSE) navigated a challenging period, closing 3.3% lower. All major indexes experienced a 5% downturn, reflecting a significant sell-off in equity markets. This was driven by capital outflows, which surged to R56 billion, surpassing the average monthly outflow. These trends were influenced by both global concerns, as explained earlier, and local challenges such as load-shedding and logistical disruptions impacting production and exports.
The repercussions of these events have extended to the country's fiscal position. Tax figures from the South African Revenue Service (SARS) indicate weak revenue generation, while spending has exceeded expectations.
The above implication can be seen in the The South African Rand faced further depreciation against the US dollar in September, reflecting the prevailing market dynamics. This trend is a testament to the ongoing challenges and uncertainties faced by the South African economy.
South African 10-year yields saw a modest increase to 10.6%, as investors grapple with mounting concerns over the government's fiscal position. This rise is also bolstered by the prevailing higher-for-longer interest rate outlook and the overall uncertainty surrounding the global economy. Major central banks, including the Federal Reserve, have signaled their intent to maintain interest rates at elevated levels as a measure to counteract inflationary pressures. This stance contributes to the apprehension among investors.
The complex interplay of these factors underscores the intricate landscape within which the Johannesburg Stock Exchange operates. Navigating this environment requires a keen understanding of both local and global economic dynamics.
The South African Reserve Bank kept its key repo rate unchanged at 8.25% in September 2023, emphasizing the ongoing battle against inflation. The South African economy showed signs of slowing growth, although the reduction in power outages played a role in a stronger performance in sectors like manufacturing and mining. Headline inflation is projected to rise slightly before gradually reverting to the mid-point of the target range in 2025.
Retail Trade and Manufacturing: Struggling Sectors
The retail trade sector in South Africa continued to face challenges, with a 1.8% year-on-year drop in July 2023, marking the eighth consecutive month of poor performance. These difficulties stem from persistently tough economic conditions exacerbated by elevated interest rates. Manufacturing business activity fell to 45.4 in September 2023 from 49.7 in the previous month, indicating the eighth consecutive month of contraction in South Africa's factory activity.
Commodities Market: Oil Prices and Gold Bearish
Brent crude oil prices closed the month above $95, supported by OPEC+ efforts to maintain tight oil supplies and robust demand. Meanwhile, Russia's fuel export ban, implemented to stabilize prices and address shortages, lacked a specified time frame. In the U.S., crude inventories saw a significant decrease, exceeding forecasts. Gold prices turned bearish, largely due to higher yields and a stronger dollar, driven by expectations of a potential year-end interest rate hike.
Conclusion: Navigating a Complex Economic Landscape
The global financial landscape is characterized by a delicate balance of challenges and opportunities. Central banks' endeavors to control inflation, fluctuations in key economic indicators, and policy decisions are pivotal factors shaping market dynamics. Investors proceed with vigilance, closely monitoring developments capable of triggering substantial shifts in the financial landscape.
