In January, during an interview, Mark Wurr, head of trading for Global Trader, said: “What this market needs is a nice 10% to 15% clean-out. A nice sell-off would bring foreigners back into the market.” Traders love volatility and Wurr is seeing quite a shake-up at the moment, with the markets all over the place as data from the United States housing market sent shockwaves across the world this week. Added to global uncertainty, the JSE on Thursday had its quarterly futures close-out, which is always guaranteed to add some spice to the day.
On the back of the US fallout, South Africa’s markets fell 2,5% on Wednesday, but Wurr was unperturbed. He said it created great stock picking opportunities and stock pickers would be moving in once the market found some stability — which is exactly what happened.
The bargain hunters in the US came into the market in full force and, despite the Dow opening down on Wednesday, it closed 20 points up and continued the upward trend on Thursday.
By midday, the local market had recovered 400 of the 600 points it shed on Wednesday, buoyed by the recovery in the US and the futures close-out.
“We had a feeling the local fund managers would use the futures close-out to pick up the market. They wanted to see the market closing at its highs,” explained Wurr.
But where to from here? Wurr said there is still a great deal of volatility ahead and he still believes a 10% correction would be healthy for this market. “It would bring people sitting on the fence back in,” he said.
The state of the US economy will be a major driving force as the cracks begin to show.
The US housing market has had economists concerned for a while. The country’s massive consumption drive, which has been keeping the rest of the world’s economies buoyant, has been funded in large part by mortgage bonds, with US consumers using their bonds as ATM machines to fund consumption.
According to Kevin Lings, economist at Stanlib, these concerns have been exacerbated by the default of sub-prime mortgage loans, which have now reached 13,6%. Sub-prime loans are mortgages advanced to individuals with shaky credit histories or erratic incomes.
The strong property market over the past few years, driven by interest rates as low as 1%, has created a boom in this industry. But the US Federal Reserve’s hiking of interest rates all the way to 5,25% in the past two years is starting to hurt.
Fears are that an already weakening property market will weaken further as demand for property declines and the banks start to flog repossessed properties on to the market. A weak property market means a weak US consumer.
While this is raising real concerns about a possible recession in the US, Lings said at this stage he believes the US economy has enough resilience not to go into a recession, but that he will be watching the housing market carefully. While South Africa is unlikely to be affected on the housing side, our financial markets will experience a contagion affect.
“Our fundamentals are sound, but we will be pulled and pushed with the global markets,” said Lings.