Now there is no need to worry over local interest rates
Risk off trading was at the order of the day as markets across Europe and America started sliding on Thursday. International markets nudged lower daily, starting last Friday, but on Wednesday the Nikkei fell off a cliff before settling later in the day. This carnage was repeated in all other major market on Thursday.
The immediate effect was that short term interest rates in Germany and the USA came down sharply showing the telltale sign that investor were fleeing stock and going for bonds. Closer to home, the Johannesburg Securities Exchange also took a knock, but the most important anomaly was the Rand’s exchange rate which actually improved before settling back to just below R8-85/US$.
To make matters worse, an explosion rocked Manhattan in New York on Thursday, adding to the uneasiness traders brought to their desks. However, at the time of going to print, there was no clear indication of the reason for the Manhattan blast with speculative articles putting it down to a gas explosion. But it did destroy two buildings and several casualties were reported. Not good for the American trading psyche.
The only positive note late in the week came from Japan where the Nikkei managed to cling onto the floor established after Wednesday’s slide.
The massive and sudden slide now begs the question whether it is the start of a major correction, or whether is just a knee-jerk after the blast in Manhattan. Another reason that featured widely on Asian analysts’ radar was the relatively modest economic performance figures that came out of Beijing but this opinion was not shared by many.
Possibly the only safe conclusion to draw at this stage is that markets were heavily inflated, and the new record highs set since the tapering talk in the US sent investors scurrying for safety, indicated speculative trading of an order of magnitude. Speculators usually try to squeeze the last fraction out of a wild bull market but watch very closely all the time for signs of weakness to make sure they are the first ones out when the cracks appear.
I have to admit, it is far too early to draw hard and fast conclusions. For all that we know, markets may just bounce back on Friday, as they have so often done, even after tapering by the Federal Reserve was first mentioned last year. The strange thing to me, is that emerging markets did not react nearly as wildly as their more mature cousins in developed economies did.
I was also amazed by the resilience in the Rand’s exchange rate. Again, possibly, this may be an indication that the exchange rate havoc the Rand started suffering in December last year may have run its course, and that emerging market sentiment has normalised in the meantime.
Of course, it is a dangerous occupation to try and be too analytical too soon when one tries to fathom market movement on a global scale. But the immediate outcome of the flight to safety is a substantial reduction in short term interest rates. It is very beneficial to us. Very similar movements could also be seen in the major price fluctuations of crude and gold. Crude oil went from US$ 102 per barrel to US$ 98 per barrel in a matter of four days while gold appreciated by more than 6% in March alone, another telltale sign that investors are looking for so-called wealth protectors, or hedges against both inflation and sudden market drops.
When short term interest rates of our main trading partners, and in particular in the USA, comes down, for whatever reason, it widens the spread. This simply means that the differential between local rates and foreign rates increases, making currency trades on local markets more attractive. The shrinking spread as rates in Germany and America slow crept up, was one of the reasons the South African Reserve Bank recently increased its repo rate. A higher rate in South Africa provides just that small space for carry trades, which, in theory, should support the Rand’s external value. At that time my opinion was that the Reserve Bank moved too early but I could not foresee the major changes in Euro and Dollar interest rates that would come this week. sIt is too soon to say if a major correction has started but I can state that a correction was widely expected, at least in some circles. If the slide continues, short term interest rates will continue to fall and the spread between the Euro and Dollar on one side, and the Rand on the other, will also continue to widen. This should be good for the Namibia Dollar exchange rate as well, and it will help a little, if fuel prices can come down following the significant reduction in crude.