Emerging markets and JSE slide on fears of frosting US-China relations

US President Joe Biden greets Chinese President Xi Jinping before a meeting during the Asia-Pacific Economic Co-operation (APEC) Leaders’ week in Woodside, California, on November 15. Photo: AFP

US President Joe Biden greets Chinese President Xi Jinping before a meeting during the Asia-Pacific Economic Co-operation (APEC) Leaders’ week in Woodside, California, on November 15. Photo: AFP

Published Nov 17, 2023


The JSE snapped a three-day rally yesterday as emerging markets (EM) slipped on fears of frosting US-China relations, a subdued Chinese economy, and a possible downgrade of South Africa’s credit ratings.

This comes after US President Joe Biden said he had not changed his view that Chinese President Xi Jinping was effectively a dictator following their meeting on the sidelines of the Asia-Pacific summit in California.

The two world’s largest economies have had a frosty relationship over the last decade, especially during Biden’s predecessor Donald Trump’s administration, which escalated into a full-blown trade war.

However, the two leaders agreed to resume critical military communication amid efforts to ease growing geopolitical tensions in Asia, while Xi praised the US as “the most important bilateral relationship in the world”.

But the impact of high-level talks between the US and China had not created a positive sentiment within emerging markets, with the Shanghai Composite falling 0.7%, the Nikkei 225 Index down 0.3%, while the Shenzhen Component dropped 1.2%.

The JSE all share index fell 1.4% to 74 750 points at about 5pm following a three-day surge driven by optimism regarding the possible conclusion of the Fed’s tightening cycle and eventual cuts.

The decline was linked to profit-taking and investor scrutiny of recent Chinese data highlighting ongoing weakness in the property sector, which poses a risk to the recovery of the world’s second-largest economy.

Data from China is showing that new home prices declined in October as demand remained sluggish, also highlighting a prolonged weakness in the country’s property sector that could weigh on the economic recovery.

Among individual stocks, Life Healthcare Group was the worst performer as it fell 5.7%, along with Gold Fields which was 4.4% down, and African Rainbow Minerals eased 3.9%, while Telkom outperformed and gained 2.3%.

Stocks were not the only losses suffered by the market as the rand also gave back some of the last two days’ massive gains.

The rand fell 0.7% to R18.32 to the US dollar as the greenback recovered on the back of the better-than-expected retail sales data out of the US.

TreasuryONE currency strategist Andre Cilliers said the mixed economic data signals had resulted in the dollar going up slightly.

Cilliers said markets could be expected to consolidate in the short term as traders await a fresh round of economic data for guidance.

“Given the scale and pace of the rand’s strengthening, we expected some consolidation and profit-taking,” Cilliers said.

“The R18.00 level will be tough to get through, and we have seen some good importer demand as they take advantage of the stronger levels.”

Meanwhile, South African traders remained edgy yesterday as bets on a possible SA Reserve Bank interest rate hike continued to roll in, while S&P is scheduled to provide a country review, and potentially rating action, which remains below investment level.

S&P has previously warned it could downgrade South Africa on a deepening of the electricity crisis or if critical infrastructure constraints worsen, and if the ongoing implementation of economic and governance reforms does not progress as planned, resulting in further deterioration in economic growth, or higher-than-expected fiscal financing needs.

Earlier this month, Moody’s Investor Services retained its South Africa credit rating at sub-investment with a stable outlook after the Medium-Term Budget Policy Statement (MTBPS).

Fitch Ratings also warned that the factors that could, individually or collectively, lead to a negative rating action/downgrade included further significant increase in government debt-to-GDP, for example, due to persistent large fiscal deficits.

Investec chief economist Annabel Bishop said the deterioration in the path of fiscal consolidation could see South Africa’s revised to a negative outlook.

Bishop said S&P recently intimated the deterioration was not enough for an outright downgrade, but the risk had risen.

“That is, the risk of credit rating downgrades having risen for South Africa on the revised MTBPS projections, and that is what a negative outlook implies, that there is a likelihood of a downgrade,” Bishop said.

“The risk is for a downgrade of the stable outlooks of the three key credit rating agencies to negative outlooks on the deterioration of the fiscal metrics in the recent MTBPS, which saw an upwards revision to debt projections.”