South African financial markets edged down on Wednesday as analysts eagerly awaited the outcome of the US Federal Reserve (Fed) meeting to decide on interest rates.
The rand fell by 0.8% to R17.72 against the US dollar, weakening from the firm previous close of R17.55/$1, as the markets anticipated that the Fed would resume the tightening cycle after a pause in June.
The Fed was Wednesday widely expected to raise the target range for the funds rate by 25 basis points to 5.25%-5.5%, bringing borrowing costs to the highest level since January 2001.
Investors will closely monitor any clues about the Fed's future plans, particularly whether it is done with the rate hikes or if it still intends to increase borrowing costs further.
In June, most officials were expecting the Fed funds rate at 5.6% by the end of the year, suggesting at least two more rate hikes but now the economic conditions have changed a bit.
Headline consumer inflation in the US slowed sharply to 3% in June, well below 9.1% a year ago.
Though the labour market has cooled off, it remains strong and the economy seems to be on track to avoid a severe recession.
Exinity chief market analyst Han Tan said the markets would be on the lookout for indications in the Fed chairman Jerome Powell’s statement as to when the Fed would end its rate hike.
“Markets are on a hunt for confirmation or perhaps vindication even, because we know there has been plenty of expectation that the Fed and other major central banks including the ECB, are very close to ending this rate hike cycle. Now the question is exactly when,” Tan said.
“That’s the most critical question facing markets right now ahead of the Fed meeting and this uncertainty has translated into prices for currency markets, gold or stocks that had little moved in recent sessions.”
Tan said the guidance from the market was predicting a 90% chance of the first rate cut happening in June 2024, with a variety of “twist and turns” between now and then characterised by China’s deflation risks feeding into the global economy and perhaps a comeback of higher inflation.
The reopening of China sparked a wave of positive market sentiment as investors anticipated a robust economic recovery.
But that optimism has been waxing and waning due to a fixation on short-term demand and growth dynamics over the last few months.
Ninety One’s Hong Kong-based portfolio manager, Wenchang Ma, said China’s recovery might be uneven, but investors should bring their attention back to the country’s long-term growth drivers.
Ma said China was going through structural changes as the country was entering an era of slower but more sustainable growth, powered by a growing middle-income population, a strong push for technology innovation, the pursuit of the energy transition and consistent reform of State-owned enterprises.
“China’s equity market is the second largest globally and is too big to ignore,” Ma said.
“We believe disciplined, bottom-up stock selection, focusing on fundamental analysis underpinned by local expertise, is the best approach to unearth investment opportunities.”
Meanwhile, the JSE All Share Index remained muted at 77 540 points, tracking a general cautious mood as traders continue to digest quarterly corporate results and await the Fed's decision on interest rates.
Pick n Pay, Telkom, Adcock Ingram, RCL Foods, and Kumba Iron Ore were leading the decline on the JSE.
BUSINESS REPORT