Middle East crisis hits SA markets: Is a financial Black Swan looming?
South African financial markets bullish run the previous five weeks came to a sudden halt last week on the back of the Middle East crisis after various attacks between Israel, Hezbollah and Syria increased fears of a full-scale war.
These accelerated geopolitical tensions forced US investors out of stocks and into safe havens such as Treasuries and the dollar since the middle of last week. The Brent oil price increased by more than $5 per barrel since the previous Friday, trading close to $78 (R1364) on Friday.
Various warnings from the US indicated that Iran may be planning a ballistic missile strike against Israel. Market analysts start to fear that another black swan movement may suddenly hit world financial markets.
Mathematician Nassim Taleb baptised the term “black swan effect” to refer to the kinds of big phenomena one never thought would happen and that have a potentially catastrophic outcome. Several black swans occurred in financial markets.
The 1987 crash on stocks represents a black swan event in financial markets. On Monday, October 19, 1987, the Dow Jones Industrial shares dropped 22.6% — the biggest single-day loss in history. The 1987 crash on stocks represents a black swan event in financial markets.
On Monday, October 19, 1987, the Dow Jones Industrial shares dropped 22.6% — the biggest single-day loss. The dot.com crash in 2000 saw the Nasdaq index lost 78% of its value. This was followed by 9/11 attacks in 2001, the global financial crisis in 2008, the Covid pandemic at the end of 2019 and the Russia-Ukraine war, which contributed to pushing world inflation into double digits.
South African equity and foreign exchange markets became nervous last week on the back of the geopolitical movements in the Middle East.
On the JSE stock prices turned around after five weeks of unprecedented growth. The all share index ended the week 600 points, or 0.6%, down, and the Rand depreciated with 39 cents to R17.50 to the dollar after it reached its strongest level this year of R17.11 the previous Friday.
Although these movements on equity markets and the foreign exchange markets are still far away from a downward correction, or a black swan movement in these markets, the vulnerability of South Africa and other emerging markets on the events in the Middle East cannot be ignored.
The release of the US non-farm payrolls on Friday seems to have calmed markets down. US jobless growth in September decreased from 4.2% in August to 4.1% in September as its economy added 254 000 jobs in September, much higher than an upwardly revised 159 000 in August, and well above the expectations of a growth of 140 000 new jobs.
US equity prices recovered strongly on Friday, as recession expectations seem to disappear. The Dow Jones industrial index ended the day 0.8% higher and managed to end the week 0.2% in the green. The S&P500 index gained 0.9% on Friday and stronger by 0.5% over the week.
Investors returned to risky assets and the dollar weakened. The gold price returned to levels of above $2 664 in late trade on Friday evening. However, doubt is starting to emerge if the US Federal Reserve will drop its Bank rate again by 0.5% at their next meeting in November.
This coming week all eyes will be on the release of the US inflation rate data for September on Wednesday. It is expected that the mainline inflation rate had decreased to 2.3%, down from 2.5% the previous month. The inflation rate that is of interest for the US Fed, namely core inflation is expected to have subsided to 3.1% from 3.2% in August 2023. This data will give more certainty towards expectations on the Fed’s next interest rate decision in November.
Domestically, Statistics South Africa will release the latest mining and manufacturing production numbers.
Chris Harmse is the consulting economist of Sequoia Capital Management and a senior lecturer at Stadio Higher Education.
BUSINESS REPORT