How far does the US reach?

By Staff Writer


From Business Report
October 23 2007
By Ethel Hazelhurst

Johannesburg - About 174 US companies, worth 28.4 percent of the benchmark Standard & Poor's 500 index, are due to release their financial results this week, and the numbers will have a major effect on stock markets around the world.

Jeff Gable, head of research at Absa, told Business Report yesterday that the week ahead would be a big one for global investors, as the results come in the wake of poor numbers from US corporates last week.

Recent gyrations in global stock markets reflect fears about the US economy, as the spillover from credit defaults erodes the country's growth potential.

Most stock markets fell sharply yesterday in the first five minutes of trading, after a 2.6 percent fall on Wall Street on Friday and a 4.5 percent slide from its peak on October 9.

On the JSE, the all share index fell 1.28 percent in the first five minutes, and was down 2 percent to 30 146.6 shortly after 5pm. This came after a fall of 1.5 percent last week, according to Nedbank Capital.

Goolam Ballim, chief economist at Standard Bank, said: "Earlier indiscriminate market participation is evaporating and the market is now pricing in more realistic values."

The falls in share prices have come as escalating oil prices add to the general uncertainty about the economic outlook. Oil prices hits highs of $83 (R565) to $93 to the barrel, depending on the blend, said Tony Twine, an economist at Econometrix. He said South Africa was cushioned from the immediate effect of these record levels because the prices of its commodity exports had made similar gains, countering the effect of imported energy prices.

But Twine warned that there would be an indirect effect if rising energy prices slowed growth in industrialised economies, limiting the demand for commodities.

Reuters reported that the gold price fell 2.6 percent yesterday, as "worries about the US economy and fears over bank credit" forced a selloff.

Ballim said the local economy was now operating at two speeds. "Consumers, who make up about two-thirds of the economy, are facing the headwinds so the retail sector is suffering. But there is buoyancy in the construction sector."

Michael Power, a strategist at Investec Asset Management also spoke of two economies - in this case, "two economies running side by side in the world - one centred on China and the other on the US".

China is fuelling the commodity price boom, which is sheltering South Africa from the slowdown in the US.

"The question is whether a hard landing in the US would depress China's commodity demand and thereby commodity markets and prices," Power said. "If the US has a really hard landing, there is arguably a bubble in Asian equity prices too - and conceivably even in commodities."

He predicted Asia would be the first to recover "from this widening soft patch in mid- to late 2008, and drag commodities with it two to three quarters later".

Gable ruled out recession in the US. "We have in fact revised our quarter three estimates for US gross domestic product up to 3 percent from 2.5 percent," he said. "But, after recent discouraging news from the housing market, we have reduced the quarter four estimate to 1.4 percent from 2 percent."

He predicted a 25 basis point rate cut when the US Federal Open Market Committee meets at the end of the month, after last month's reduction of 50 basis points to 4.75 percent.

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