Oil prices and Middle East crisis impact SA financial outlook, says Chris Harmse

South African financial markets remain volatile and uncertain given the Middle East crisis and worries on the Chinese economy.

The Brent oil price increased to $80.75 (R1412) per barrel on Monday last week and traded at $79.03 at the close on Friday. This is almost $10 per barrel up from $69.75 per barrel on September 26, 2024. This was also the last day up to which the decrease in fuel prices was calculated by the Central Energy Fund (CEF) to lower fuel prices during October.

The exchange rate, however, appreciated strongly on Friday to R17.36/$. This is 11c better than the previous Friday and still a few cents stronger than the R17.67 average than what the CEF used in lowering the fuel price in October. Given the high base of last year October and November the current surge in oil prices that may affect the petrol price negatively will not cause an upwards surge in the South African inflation rate and preventing the Monetary Policy Committee (MPC) from lowering its repo rate during the next six months.

US inflation data for September that was released last week came in higher than expected. Headline inflation rate decreased to 2.4%, down from 2.5% the previous month, but higher than market expectations of 2.3%. The main indicator that the US Federal Reserve uses to lower its Bank rate, namely core inflation (that is inflation excluding fuel and food prices) rate unexpectedly edged up to 3.3%, compared to 3.2% in the previous two months. Expectations for core inflation were 3.2%.

Analysts are now starting to question, given the sharp increase in the price of oil and core inflation that remains at its current level, whether the Fed during its November meeting will cut its repo rate by another 50 basis points.

The sudden increase by more than expected job losses on Thursday also boosted sentiment that the Fed may after all continue to cut rates more aggressively.

South African equity and foreign exchange markets moved sideways for the first four days last week on the uncertainty of escalating war clouds in the Middle East and the lack of implementation of stimulus in China. Investors avoided assets, like emerging market equities, and bought US stocks and the US dollar as a haven.

Precious metals prices like platinum and gold also took a hiding. The gold price lost $45 per ounce from the previous Friday to $2 607 last Wednesday. It then recovered quickly to $2 657 on Friday, up by $3 over the week.

Equity prices followed the same trend. On the JSE, the All Share Index lost 1.15% during the first part of the week but then again recovered sharply on Friday to close only down 0.2% for the week.

On US share bourses, equity prices had a good week. The S&P500 traded 1.4% up for the week,the Dow Jones Industrial index was up by 1.36% and the Nasdaq improved by 1.5%.

In the coming week all eyes will be on the release of China’s inflation rate today and its gross domestic product growth rate for quarter three on Friday. These data that may give an indication on China’s plans to stimulate the economy. In the US the release of the September retail numbers and jobless claims on Thursday will set the tone for the week close in equity, bond and exchange rate markets. The UK will announce its latest unemployment rate (Tuesday) and inflation rate for September (Wednesday).

Domestically, Statistics South Africa will release the retail sales for August on Wednesday and the inflation rate for September on Thursday. It is expected that the increase in the CPI will remain at 4.3% - still lower than the MPC’s midpoint target of 4.5%. This will boost changes for another 0.25 repo rate cut in November.

Chris Harmse is the consulting economist of Sequoia Capital Management and a senior lecturer at Stadio Higher Education.

BUSINESS REPORT