Markets take bad news on the chin

Last Wednesday the JSE ran up to a fresh all-time high, tracking optimism on global markets.

In testimony to the US Congress, Federal Reserve boss Janet Yellen painted a healthy picture of the US economy, but warned of possible false dawns; previous periods when data mistakenly pointed to a pick-up in growth and an improvement in the labour market.

Her concerns remained labour's poor participation rate (the jobless who had given up looking for employment) and, because of America's diverged political beliefs, the absence of supply-side support, ingredients vital to aid the speed of economic recovery - immigration reform, critical investment in infrastructure, an increase in government spending and tax relief.

Until these issues were agreed, interest rates would remain low, an outcome the equity and bond markets savoured and celebrated.

But it wasn't only Yellen's assurances that lifted spirits at global trading desks; China reported its economy had expanded by 7.5% year-on-year in the second quarter, a fraction ahead of market forecasts. While analysts fretted about the fitness of the property and credit markets, the improved number verified the administration's stimulus endeavours were beginning to take hold and the economy was unlikely to experience a vaunted hard landing.

The market's final boost came from Europe, where on top of easing worries about debt issues in Portugal trade figures revealed signs that exports were recovering, even if internal demand in the region remained a headache.

There's a market adage that says markets can tame tigers. Before we had time to soak up Wednesday's giddy performance, we woke to news that the US and European Union were ratcheting up sanctions against Russia because of their patronage of rebel forces in Ukraine. The new round of measures were designed to go beyond travel bans and asset freezes and would target state-run companies, proscribing imports and blocking interaction with Western financial institutions, moves calculated to weaken Russia's resource-dependent economy and force it to retract military support for Ukrainian separationists.

Developing markets, fearing the actions would hoist oil and gas prices, plunged, only to suffer another blow when Israel announced it would commence ground operations in the Gaza Strip. Before the day was through, reports emerged that a Malaysian aircraft had been shot down by a missile over eastern Ukraine.

Traders went to bed unsettled, gripped by fears that an escalation of geopolitical tensions would trigger a pressingly necessary correction in markets that so many doubters had been forecasting for the past year or so.

In the end there was no need for alarm. After a wobbly start on Friday, international markets began heading higher, market participants reasoning that the shooting down of the Malaysian airplane was a one-off incident, and international condemnation of the murder of innocent travellers would bring the crisis in Ukraine to a conclusion by focusing the conflicting parties on peaceful resolution.

By close of trade, most international markets were up on the week, including the JSE, even though domestic investors had endured the extra pain of a Reserve Bank blow to the solar plexus.

Governor Gill Marcus surprisingly raised interest rates by a quarter percent on Thursday, a compromise between the need to anchor inflation and maintain growth. Markets shrugged off the rate hike as a non-event, but it was her sobering account of the economy that raised anxiety levels. She expressed deep concern about the recent strike action, and accordingly downgraded the central bank's growth forecast for 2014 to 1.7%, reducing her outlook for 2015 and 2016 as well.

Her grim evaluation of the South African economy should have bothered investors. It didn't. Projecting beyond our current problems, buyers on the JSE returned in flocks.

Alexander Forbes was hugely over-subscribed, despite its expensive pricing and modest expectations, and SAB Miller's R11-billion stake in Tsogo Sun was snapped up by institutions.

Looking at a chart of the JSE, it runs from the bottom left corner to the top right corner, and nothing looks like it's going to alter the market's upward course.