The initial market reaction of a surge in United States equities, a slump in the dollar and a sell-off in the US bond market to President George Bush’s re-election is likely to set the tone for his second four-year term of office.
This reaction saw the Dow Jones index open with a triple-digit gain, while the Nasdaq reclaimed the 2 000 level, but the dollar lost 1,4% as it moved from a best level of $1,2657 per euro to $1,2829, less than 0.7% away from the record worst level of $1,2925 per euro reached on February 18 this year.
The 10-year US government bond yield swung from Tuesday’s close of 4,05% to a worst level of 4,2% before closing at 4,07%.
The reaction of US financial markets was reflected in South African financial markets.
The JSE Securities Exchange all-share index rose by 0,33% on Wednesday and the industrial index added 0.91%. Resources slipped 0,28% and the platinum-mining index was down 0,46%.
Financials were 0,38% better, while the banking index lost 0,56%. The gold index was down 0,77%.
The rand had a volatile day, mirroring the dollar’s initial gains and then losses and swung from a worst level of R6,1850 per dollar to a best level of R6,0626, which was the best level since July 23.
The benchmark R153 South African government bond yield swung from a worst level of 8,680% to a best level of 8,610%, which was also its close from Tuesday’s close of 8,640%.
Standard Bank economists said late on Wednesday that the recent break in the dollar’s summer trading range signals that positioning has caught up with prevailing sentiment.
In part, the dollar’s fresh softness is a play on oil prices, with firm quotes in the latter sullying cyclical growth momentum. Moreover, fiscal thrust may lose force in 2005 and the effect of past stimulus will fade, especially in the latter half of the year.
There is also lingering concern about the large debit balance on the current account and consequences for the greenback. The deficit may only peak next year, and at more than 6% of gross domestic product.
Noticeably, there has been a discernible decline in net foreign portfolio inflows relative to the trade gap. Apart from a diminished appetite for US assets from Asian investors, it appears that Middle Eastern petrodollars are also being recycled outside of the US, in contrast to historical trends.
Adding to the sell conviction underpinning the dollar is the increased hint of a policy shift towards a weaker currency by the next US administration.
While it is understood that a rebalancing of global growth is part solution to correcting the current account shortfall, a weaker dollar may serve to keep the gap in the balance in check.
In short, the outlook for the dollar remains ominous, with the likelihood that the rand will remain firm, even if only by default.
However, the Standard Bank economists said this does not suggest that the rand is fundamentally unattractive. Indeed, a rising economic growth profile, constructive sovereign risk assessments, relatively inexpensive equities and still favourable export prices add to the likelihood of persistent rand potency.
Moreover, South Africa’s diminished yield spread, relative to the developed world, is of less consequence to the rand equation given global investors’ proclivity for commodity exposure generally. This is premised largely on China’s secular growth dynamic and notwithstanding its cyclical restraint.
The bottom line is that the rand is therefore likely to remain strong, keeping inflation subdued, allowing the South African Reserve Bank to cut interest rates further.
This will be good for domestic-oriented equities such as the retailers, who have already seen their share prices rise by 155% since March 2003, while keeping the pressure on resource stocks.
The bond market is the most difficult to call, as it normally takes its cue from the US bond market.
A Bush victory is likely to mean that the fiscal deficit will remain large, putting pressure on the US bond market. The offsetting factor is weak US economic growth.
A strong rand, subdued inflation and possible interest rate cuts should also be good for the South African bond market, while good growth is likely to result in above-forecast revenue growth and consequently a lower-than-expected fiscal deficit. — I-Net Bridge