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International central banks will continue to support economies and markets for a long time

July 2020

Share markets, exchange rates, commodities, international developments, domestic economic indicators

  • A number of countries experienced a further increase in share markets during July.

  • Some have recovered fully, while others have regained almost all the losses caused by the Coronavirus and subsequent lockdowns.

  • The magnitude of the impact of Covid-19 also became clear as countries and regions started to announce their economic growth/contraction rates for Q2 2020.

  • For instance, the USA’s economy contracted at a seasonally adjusted and annualized rate of 32.9% from Q1 2020. The Euro economy contracted by 40.3% - with Germany contracting by 34.7% and Spain by 55.9%. (Note: These numbers are annualized rates – dividing it by 4 will provide a rough indication of the quarterly rates.)

  • However, China’s economy, which contracted by around 34% in Q1 2020, recovered strongly to grow by more than 50%. (Note: The recovery rates will be exaggerated as it is measured from a low base.)

  • At the same time, unemployment rates are decreasing as economies opened up, while consumer price inflation rates remained at very low levels and interest rates kept declining.

  • The low interest rates and markets being flooded with liquidity supported share markets, especially technology stocks. The five big technology companies, Apple, Amazon, Facebook, Google (Alphabet) and Microsoft increased their market shares significantly since the lockdown – and are the driving forces behind the recovery in share markets.

  • Gold mining shares also received support from a weakening US$ during July. Rising coronavirus cases, falling bond yields, expiring stimulus benefits for households, BLF-related protests, and renewed trade tensions between the US and China contributed to the decline in the US$.

  • The gold price increased by more than 10% in July to around $1 975 per ounce. This assisted share prices of resources listed on the JSE, which increased by more than 8% in July.

  • With the assistance of Naspers, these shares contributed to the JSE ALSI increasing by another 2.5% in July to 55 721.8 points. This further increase means that the JSE ALSI has recovered almost all its losses caused by the lockdown – it was just 1.9% lower compared to July 2019 (almost 30% lower in March).

  • However, it is not going well in the rest of the South African economy despite the Reserve Bank’s decision to reduce interest rates by another 25 basis points. Initial indicators (see table below) point to an economic contraction rate of more than 40% in Q2 – following a contraction in Q1 – while the statistical recovery in Q3 will not be as large as in other countries.

  • Going forward, international central banks will continue to support economies and markets for a long time. However, in South Africa, a different economic path than the one favoured by the ruling party will be necessary to turn the economy around.

Courtesy: Multivest Economic Division

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