Local markets plunge amid Trump’s election win, Fed’s rate cut - Chris Harmse
South African equity prices continue to weaken for the second consecutive week. Global share markets were uncertain and mostly negative at the beginning of last week as they awaited the results of the US presidential election and the interest rate decision by the Federal Open Market Committee of the US Federal Reserve last Thursday.
Investors discounted the effect on the South African economy and risky assets with the possibility that Donald Trump might win. Concerns for South Africa’s economy and its trade and political relations with the US became more pronounced as Trump's win seemed increasingly likely.
South Africa’s position under the African Growth and Opportunity Act (Agoa) became a point of concern, alongside broader political relations between Washington and Pretoria, given South Africa’s recent alignment with Russia and the legal case it filed against Israel's actions in the Middle East.
South Africa is the largest beneficiary of Agoa, a program that grants qualifying sub-Saharan African countries duty-free access to the U.S. market for more than 1 800 products. The current Agoa term ends in 2025, raising fears that South Africa may lose its access when the program is renewed. U.S. imports from South Africa amounted to $14.6 billion (R270bn) in 2022, a 68% increase from 2012, while US exports to South Africa reached $6.5bn in the same year.
The Brookings Institute estimated that the loss of Agoa would have a minor effect on exports (falling by 2.7%) and gross domestic product (GDP) (contracting by only 0.06%). However, some sectors may be more seriously affected, with potential job losses.
The food and beverages sector would be hardest hit, with exports to the US predicted to fall by 16%, followed by a 13% drop in the transport equipment sector, a 4.5% drop in fruit and vegetables, and a 3.6% decline in the leather and clothing sector. The most significant impact, though not easily measurable, is the potential loss of Agoa's effect on investment and market confidence, already evident in South Africa’s share and foreign exchange markets.
In response to Agoa concerns, the All Share Index (ALSI) on the JSE began to lose value last Tuesday, dropping 1313 points, or 1.5%, on Wednesday. Despite a slight recovery in the index on Thursday, the US Fed's bank rate reduction of 0.25% that day led high-risk investors to exit equities and gold.
On Friday, equities remained under pressure, with the ALSI losing another 1.05%. The Resources10 Index declined by over 2.0% as gold prices dropped $58 since the start of last week. The Rand also depreciated, falling from R17.38 last Tuesday to R17.75/$ in intraday trading on Wednesday as it became evident that Trump would secure a second term. Although the currency improved slightly after the Fed’s rate cut on Thursday, it still ended the week twenty cents weaker at R17.59/$.
President Cyril Ramaphosa had a phone conversation with Trump on Friday, assuring him that US-South African trade relations remain on track. This may help stabilise the equity and currency markets this week. Investor attention will now focus on the Reserve Bank’s Monetary Policy Committee decision on November 21.
This week, global and domestic financial markets await several key economic indicators: the UK unemployment rate on Tuesday; US. inflation and core inflation rates on Wednesday; and a monetary policy speech from Federal Reserve chair Jerome Powell on Thursday. The UK's preliminary GDP growth rate, US and Chinese retail sales figures, and China’s manufacturing production data for October, all released on Friday, will also be of interest.
Domestically, Statistics South Africa (StatsSA) will announce South Africa’s quarter three (Q3) unemployment rate on Tuesday, with expectations for a decline from 33.5% in Q3 to 32.9%. StatsSA will also release September's gold production and mining production figures on Thursday.
Chris Harmse is the consulting economist of Sequoia Capital Management and a senior lecturer at Stadio Higher Education.
BUSINESS REPORT