Volatility likely to persist following global currency turmoil, SA investors warn

Source: Reuters.

This follows a significant sell-off in major global markets, which led investors across Asia, Europe, and North America to simultaneously dump risky assets, causing the rand to fall to its lowest point in nearly two months.

The Japan index saw its worst day in 37 years.

The CBOE Volatility Index (VIX), spiked above 65, reaching levels not seen since the pandemic.

At 6.15pm on Monday the rand had weakened 1.36% to R18.54/$.

The dramatic decline sparked concerns about whether investors are on the brink of a historic stock market crash akin to the global financial crisis or Black Monday of 1987.

Crash concerns emerge

Volatility emerged after the US Federal Reserve hinted on Wednesday, July 31, about potential interest rate cuts, which initially boosted stock markets. However, investors soon interpreted these rate cuts as a signal of underlying economic weakness, leading to a swift reversal of gains.

Recent economic data, including figures on manufacturing, durable goods, and particularly jobs and payrolls, have cast doubt on the strength of the US economy.

Notably, the respected ‘Sahm Rule’ has signaled a recession. This rule, which activates when the unemployment rate rises sharply, has accurately predicted every recession since World War II. The rule is triggered when the three-month average of the unemployment rate rises by 0.50 percentage points or more above its low point over the previous 12 months.

Easing into recovery

Meanwhile, the currency market frenzy has since eased. At 16:15 on Tuesday, the dollar regained ground on the euro and pound, with the common currency off 0.3% at $1.09220, having hit a seven-month high of $1.1009 during Monday’s turmoil.

The dollar was at 144.28 yen, roughly unchanged for the day, after declining against the Japanese currency for five consecutive sessions. Over the past five trading days, the greenback has dropped approximately 6% against the yen.

“With the same breath, the Nikkei and Topix reversed most of yesterday’s losses, closing close to 7% up in both cases after the Nikkei recorded its most significant loss since the 1987 Black Monday crash,” said Andre Cilliers, director of TreasuryONE.

“The Reserve Bank of Australia (RBA) kept rates on hold this morning. Overall, the RBA is expected to be the last among G10 central banks to start cutting interest rates. The Aussie has also clawed back some of the losses from yesterday’s session. Commodity prices have also benefited from the improved risk factor, with Oil prices surging 1% thus far.

“The Rand opened below the R18.50 handle this morning after risk sentiment improved in the early morning hours.”

Maintaining a cautious outlook

But while the dollar has recovered ground, SA investors remain cautious.

“We will still take our cues from global risk sentiment and could expect volatility to remain for the days to come,” Cilliers said.

“This week will be key for markets, with the Fed FOMC and Bank of Japan monetary policy meeting on Wednesday, 7 August 2024, while the Bank of England MPC meeting will be held on Thursday.

“The Fed is expected to keep rates on hold but markets are looking for a more dovish outlook going forward. The BOJ is forecast to hike rates while markets are split as to what the BOE will do. Later in the week, we have the all-important US nonfarm payrolls and unemployment numbers.”

On Monday, US central bank policymakers countered the idea that the weaker-than-expected job data from July indicates an imminent recession. However, they also cautioned that the Fed may need to lower interest rates to prevent such a scenario.