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Financial markets remain under pressure

FINANCIAL markets remain under pressure as more and more economic indicators point towards stagflation (high inflation and low growth).

 

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The US Federal Reserve chairperson, Jerome Powell, speaking at the opening of the Jackson Hole conference on Friday, had only a few words for markets and economists out there and that is that US interest rates are bound to stay high for longer as inflation fears seem to continue. This remark came despite a subsiding in the US inflation rate from 9.1 percent in June to 8.5 percent in July.

Powell said, “We are moving our policy stance purposefully to a level that will be sufficiently restrictive to return inflation to 2 percent. Restoring price stability will likely require maintaining a restrictive policy stance for some time.”

In reaction to this more hawkish stance by the Fed, US equity prices remain under pressure. On Friday the Dow Jones industrial index ended more than 1000 points lower (3.34 percent) for the day and wiping out all the gains of earlier in the week. The index is still 11.7 percent down for the year-to-date. The Nasdaq lost almost 4 percent on Friday alone and is now trading 23.3 percent lower than at the beginning of the year. The bearish market movement on the S&P500 board also remains as the index lost 3.4 percent on Friday and it remains15.4 percent down for the year.

Of interest however is that US unemployment remains much lower, around 5 percent, against the double figures during the previous stagflation years of 1975, 1982 and 2009. Also of note is the current recovery in US consumer sentiment over the past two months. Sentiment improved from 50.0 in June to 58.2 in July. The low unemployment number and turn around in consumer sentiment may be the injection that equity prices seek to recover in months to come

South Africa’s inflation rate recorded a strong increase in July to 7.8 percent from 7.4 percent in June. The main contributors were food and non-alcoholic beverages that had increased by 9.7 percent year-on-year, and transport (that includes the sharp rise in fuel prices) that had increased by 25 percent over the past year, and contributed 3.4 percentage points to the total inflation rate.

Fears of higher interest rates globally and locally, as well as the economy moving into a recession over the next two quarters, have put pressure on equity prices and the rand exchange rate. At the same time, oil prices across the globe had shot up again, with Brent oil trading for most of last week around $100 (R1689) a barrel.

Together with the strong surge in the inflation rate as well as negative global sentiment, share prices on the JSE remain under pressure, but due to a weaker rand and higher commodity prices, the all share index managed to end the week 0.6 percent higher. The index is, however, still 4.8 percent down for the year-to-date, but much stronger than the heavy falls in US, UK and EU indices.

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