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Shares and bonds continue to rally: More to come?

Shares and bonds continue to rally: More to come?

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South African equities and bonds continued their rally last week and were pushed to even better levels last Thursday with the news that the US inflation rate came in way below expectations on 7.7% for October, down from 8.2%, and below forecast of 8%.

The all share index (ALSI) on the JSE ended the week 5.3% higher. During the first four days of the week, and before the announcement of the steep decline in US inflation rate, the ALSI already had improve by 2.02%, due to higher prices for gold and platinum.

Gold bullion increased rapidly with $77 (R1328) last Monday to the close at 5pm on Thursday, November 10, trading on $1 751 per ounce. Platinum had increased over the same four days with $74 per ounce to close Thursday evening at 5pm on $1031, before the inflation news from the US.

In the process the Resources 10 index had shot up by 4.4%. At the close on Friday, the gold price ended $13 (0.8% up for the day) on $1763, while platinum ended the day up higher with another $8 on $1039. On Friday alone the ALSI improved by 3.1% (2 273 points) and the Resources 10 index shot up by 4.05%.

On the bond market bond returns also improved strongly last week. On the JSE, the All-Bond Index (ALBI), at the end of October 2022 already recorded almost double over a year period.

The current yield for one to three years duration bonds was 10.03%, three to seven years recorded 9.89%, seven to 12 years 9.57% and 12 and more years 11.2%. The current yield for the ALBI was 10.45%. Last week the Government 10-year bond index had improved by 4% and is now 10.9% up for the year-to- date.

It is predicted by various researchers and analysts that the prices for gold and platinum will continue to rise over the next six months, as the Federal Reserve of the US will continue to increase interest rates, although at lower increments. It is expected that the gold price will reach levels higher than $1800 by the end of December 2022.

It is also expected that due to less stringent Covid-19 regulations in China, the Hong Kong and Shanghai share indices will continue to recover. This will also have a positive effect on commodity prices and dual listed commodity and metal shares on the JSE.

In the US, the economy remains strong, especially after the economy added another 261 000 jobs in October 2022. This was well ahead of expectations of 200 000. This, despite the Fed’s efforts to decrease the demand for labour, which is, pushing up wages, which in turn, feeds into higher prices.

Economists are analysing that the Fed can continue to increase interest rates, without pushing the economy into a recession. The US economy in fact recorded an economic growth rate of 2.6% in quarter three of 2022, beating forecasts of 2.4% increase in the real gross domestic product (GDP). The Fed remains imminent that it will continue to increase its bank rate till the US inflation rate is back on 2%.

The rand exchange rate improved strongly last week. Against the US dollar the currency appreciated by 66 cents over the past seven days, from R17.91 to the dollar to R17.25 on Saturday. The rand moved flat against the British pound on R20.39, as well as against the euro on R17.87, indicating that the dollar lost ground, especially after the release of the inflation rate on Thursday.

According to the Central Energy Fund, the price for diesel was over-recovered with 7c per litre on Thursday, meaning that the price is likely to come down at the beginning of December, as the rand appreciated, and the price of refined diesel had also decreased marginally over the past 12 days. The price for 95 petrol, however, is still 120c a litre under-recovered.

Domestically this coming week, the release of South Africa’s retail sales for September will draw attention. It is expected that the sales at the tills had increased by 1.7% year-on-year, against the 2% recorded during August 2022.

On global markets, the release Japan’s GDP growth rate today will be of importance (expected rate of 0.3%). Various countries will also release their latest inflation rates for October 2022, namely on Wednesday, the UK (expected on 10.6%) and Canada (expected on 6.6%), and on Thursday the Euro Zone (expected on 10.7%) and Japan (expected on 3.5%).

The US will announce its retail sales, industrial and manufacturing production data for October on Wednesday. Of importance will also be the release of the UK’s unemployment rate for September on Tuesday.

Chris Harmse is an economist at Sequoia Capital Management and lecturer at the School of Commerce at Stadio University.


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