Have global equities hit a slump?
Higher interest rates in the US will increase borrowing costs for companies, which affects profits and makes stocks less attractive
Market analysts are wondering whether the tide has turned against global equities.
That is the question being asked after the benchmark US 10-year bond crossed the 3% level this week.
The catalyst was higher oil prices, raising the prospect of higher inflation, with the US Federal Reserve likely to hike interest rates more aggressively.
Analysts say the JSE all share could potentially benefit from the new realities, but trading was likely to be volatile thanks to a skittish rand.
Higher interest rates increase the borrowing costs for companies. The greater expense affects profits negatively, making equities theoretically a less attractive investment.
The JSE all share is down 4.23% so far in 2018 and closed 1.19% lower at 56,987.20 on Wednesday. The Dow has lost 2.8%. The rand has weakened from R11.5069/$ end-February to R12.53 on Wednesday.
The percentage drop for the JSE all share so far in 2018, and it closed 1.19% lower at 56,987.20 on Wednesday
With an expected firmer dollar, the rand is likely to weaken further, which may benefit rand hedges and mining stocks. At the same time, banks, retailers and financials could weaken, pulling the market down.
"There is little doubt that the market focus has shifted from trade wars and geopolitical tensions to the US treasury yield and inflation story," says TreasuryOne dealer Andre Botha.
This could well mean that the rand is in for a bit of a torrid time, in line with other emerging markets, he said.
"We expect the rand to reverse some of the losses in the medium term, as we are still one of the favoured carry-trade destinations," said Botha.
Carry trade refers to investors borrowing in low interest rate currencies, notably the yen, and then investing money in currencies where a higher rate was prevalent, such as the rand.
However, Nedbank Corporate and Investment Banking analyst Neels Heyneke says there might be more negative consequences for the rand.
A stronger dollar would lead to a contraction in global liquidity, which would lower carry-trade returns.
The JSE has already probably seen the consequences of the new realities, with foreigners selling equities last week. Trade is characterised by lower than average volumes.
"There is little doubt that the US 10-year is against a major support level," Heyneke said.
Asset manager BlackRock foresees some lower returns from markets.
Global equities are experiencing an unprecedented nine-year bull market. This was the consequence of the easing of monetary policies following the financial crisis in 2008-09.