Disjunct is not a powerful enough word to describe the markets
The Allshare Index on the Johannesburg Securities Exchange set a new record on Wednesday when it closed at 34788 index points in a heavily traded market with over 208 million shares changing hands. As a prelude to Wednesday’s all-time high, a new historical record was already set on Tuesday when the index closed at 34714. At the close of trade on Thursday afternoon, it had given up some of its recent gains, receding by 0.7% to 34534 but still comfortably close to the record levels earlier in the week.
The previous after-crisis (2008) record was around September last year when the index exceeded 34400. When the international financial crisis struck in August 2008, the JSE traded around 33300. It is one of the few indices world wide that has managed to exceed its pre-crisis levels.
Trade on the JSE is very much a mirror function of trade on the London Stock Exchange. The FTSE 100 and the JSE Allshare track each other in close reciprocity and a daily graph of the one is usually a facsimile of the daily graph of the other. This can often be explained by a small number of dual listed shares that are not so big by UK standards but are the elephants on the JSE trading floor. So when shares like Old Mutual and Anglo American take a beating in London, the impact is more than amplified in Johannesburg and the visible result is that the South African index turns into a proxy of its much bigger brother.
The inexplicable part of market movements this week is the performance of the South African Rand. The Rand does not slavishly track the UK Pound although there is a very strong correlation. But it tracks the Euro like a bloodhound and when the Euro gets dumped, the Rand gets dumped. So, while market in southern Africa set new records during the week, the main regional currency appeared very lacklustre, deteriorating to R8-40 by Thursday from around R8-20 earlier in the week. Vividly capturing the Rand Euro umbilical link are the charts for Euro Dollar exchange rate and Dollar Rand exchange rate. These two could just as well have been plotted on the same graph and it would almost be the same curve.
Disjunct is a term that has become very popular since the crashes of 2008. It describes the inability of analysts to fully comprehend the complexities and the machinations of large markets but it refers more specifically to the observable absence of coordination between general economic performance and stock market values. When the JSE Allshare exceeds 34000 and the Rand deteriorates to R8-40/US$1, then it certainly is a case of a disjunct market.
There are absolutely no fundamentals in place in the South African economy that warrants a share index to exceed its pre-crisis levels, let alone set new all-time highs. And when the currency plunges from the R7-60/USD level to 8-40, it is a further indication of mark to market mechanisms breaking down. There is also no new developments in the South African economy that prescribe a weaker Rand other than skewed or misguided sentiments in the big money markets where the Rand’s destiny is determined. With inflation steadily receding over three months, the real return on Rand carry investments should be marginally better implying that the Rand should be stronger and not weaker.
Of course, the exporters are overjoyed when the Rand is weaker but for the consumer, this gain is offset by a higher Rand crude price and it is only after substantial relaxing of the crude price in London that a slight relief in the pump price of fuel is experienced locally.
We are fast approaching the fourth anniversary of the collapse of Lehman Brothers, the trigger event that forced the world to realise one cannot live indefinitely with a negative gearing. In my view, markets have been mostly disjunct for most of the time since the crisis. Even the local Namibian Stock Exchange, although usually very static, display elements of a market out of sync, or perhaps out of touch.
In 2008 when the JSE passed the 33300 mark I became very jittery. This was clearly a negative signal since the market’s performance was not supported by fundamentals. What happened after that is history.
At this point I am not so scared for one reason only – the problems in Europe and the subsequent potential fall-out in the US, are so big, what happens in southern Africa is of absolutely zero consequence to them. And while they manage to keep the broken card house standing, the local bourses will also remain standing. But in a disjunct market, volatility is the hallmark and with that comes the realisation that if the trading system does break down again, it will be instantaneous, disastrous and calamitous.