Global market jitters shake investor confidence

Global market jitters shook investor confidence this week amid fears of a global recession on the cards, triggering alarm bells in what has been a bullish sentiment and somewhat complacent environment for investors around the world, with US stocks like Nvidia having led the charge in a tech-heavy rally over the first half of this year.

Rupert Hare, head of Multi Asset at Prescient Investment Management, says several drivers converged at once to cause Asian markets to open deep in negative territory on Monday and US markets to sell off, while risk indicators like the VIX Index (a measure of perceived market risk) to spike to levels not seen since Russia’s invasion of Ukraine.

“The first of those drivers was the Bank of Japan (BOJ) hiking rates to combat rising inflation, while the majority of central banks are cutting rates. In turn, this affected the significant amount of investors involved in carry trades (borrowing in the cheaper currency, investing in the higher-yielding currency) as their cost of borrowing increased and they closed out positions.”

Hare says the ripple effect then passed across the globe into US markets, with tech stocks taking the brunt of the selloff on the back of disappointing labour market statistics released last week. The US unemployment rate is now 4.3%, almost 1% above its recent low of 3.4% in 2023 triggering a well-known recession indicator called the Sahm Rule (an indicator which tracks significant deteriorations in US unemployment).

“The result was a rush to the door out of US growth assets like stocks on Monday and a strong rally in haven assets like US Treasury Bonds and a repricing downwards to up to five rate cuts from the Fed for the remainder of the year.”

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Was it a knee-jerk reaction or will there be more to come?

He points out that now that markets had a day or two to cool off, the question on everyone’s minds is whether this was a knee-jerk reaction or whether there is more to come.

“It is important to focus on the numbers rather than the narrative, with markets often getting spooked by headline news. At Prescient we leverage large volumes of data to make informed decisions, with one of our primary indicators being a nowcast of global growth (regarded as the gold standard for defining recessions).

“We process millions of data points to distil a single estimate of real gross domestic product (GDP) growth ahead of its release to gain an advantage. Our current outlook for US growth is just under 2%, below the stable growth rate of around 3%, but well above the 0% threshold to define a recession.”

However, Hare says, while not yet a recession, the issue with a 2% real growth rate is when it ties back to current valuations multiple on the S&P500 at around a 25x P/E ratio, dominated by tech stocks with much higher real growth assumptions than 2%. “That is the stack of cards that investors are pre-empting falling down.”

On the positive side, he says, South African assets, although largely driven by global market movements, are offering significant value buffers. “Unlike US equities which are coming into this scenario as being expensive, SA equities and bonds remain relatively cheap on a pure valuation basis even after the post-GNU rally.”

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Concern about US entering recession

Bianca Botes, director at Citadel Global, says global markets are facing renewed volatility due to concerns that the US may be entering a recession. “While these fears are largely considered premature, traders are anticipating a rapid economic decline following the release of poor US data towards the end of last week. These numbers could force the Fed to ease its monetary policy aggressively, although the likelihood of an emergency rate cut has decreased.”

 This uncertainty is threatening equity markets, which enjoyed a strong rally this year, she says. “Yesterday saw the S&P 500 drop by 3%, extending its decline from its peak to 8.5%. US Treasuries lost momentum after a surge, with two-year yields briefly dipping below 10-year Treasury yields, which held steady at 3.78%.

“The dollar weakened and bond sales halted amid heightened risk perceptions in the US corporate credit markets.”

 Botes says with the worst of the sell-off seemingly behind us, Citadel will now keep an eye on EU retail sales and US trade balance numbers.

The Rand also lost ground alongside all other risk assets to trade at R18.49/$, R20.26/€ and R23.64/£ on Monday. The local currency was trading at R18.50/$, R20.21/€ and R23.53/£ on Tuesday afternoon.