With equities rallying, will the USD lose its position as the “safe haven” of choice?
Financial markets are tracking higher in Europe although low volumes due to it being Whit Day across the mainland, lack of economic data from both sides of the Atlantic and a soft session on Wall Street has left indices feeling a little directionless. The FTSE100 is nicely above the 6700 level, earlier reaching highs not seen since October 2007. Germany’s DAX and France’s CAC40 markets are open despite it being a holiday there and both markets are in the black too.
Stock markets though are quiet on the whole, maintaining a bullish bias thanks to the deal news in the form of Yahoo buying Tumblr but at the same time, waiting for this week’s key economic data events for further clues over the state of the global economy. The major focus today has been on the forex and commodity markets; the yen strengthened on comments by Japan’s economy minister saying that the correction in the yen is largely completed and any further weakness in the yen could dent the Japanese economy, hitting the lives’ of people in the country. The dollar took a breather after rallying strongly this month on reports that the Fed may look to taper stimulus and the release of upbeat economic data.
The USD will remain in focus as the attention turns to Fed chairman Bernanke’s testimony and the Fed meeting minutes in Wednesday’s session. Gold prices have dipped today, continuing its downward spiral from last week as investors sold precious metals to cover forex losses on the back of the stronger yen. The South African rand plunged today amid worries about labour unrest, with the dollar trading at levels not seen since April 2009 against the rand.
The JSE and its gold mining components Fresnillo, Rangold Resources, Anglo Gold and Anglo Platinum shares today have been hit on the back of wage hike demands and gold futures dropping sharply. The sliding price of precious metals has the pressured the South African market and fears about another unwanted flare-up this year in the mining labour industry has rattled investors again.
Over the weekend, the National Union of Mineworkers [NUM] were reported to be seeking pay rises of up to 60% from gold and coal producers from the country’s mining companies, threatening strike-action which could see a repeat of last year’s rife in the labour market. The timing of these wage-increase demands is particularly worrying as gold prices have tumbled, down around 19% year-to-date and have declined more than 7% this month and near 8% last month. Last year, violence over labour strikes across the region cost mining companies billions of Rands in revenues and production, prompting the closure of mines and hampering demand for metals like gold. Labour accounts for up to 60% of costs for mining companies already.
Worries that a similar episode will play out has investors on edge as mining companies are not in a position to meet the demands of pay hikes due to the falling price of gold together with the hit to earnings faced by last year’s labour strikes. Talks between the union and miners are likely to be heated given the current backdrop of falling gold prices and rising production costs at mines. Last year, wildcat strikes left 50 people dead and violence across the mining labour market.
At the same time, the recovery in the US economy and relative comfortablity with the Federal Reserve tapering quantitative easing diminishes the “safe haven” label as investors pile on appetite for risky investments such as equities. Mining companies in South Africa now find themselves in a precarious situation as the sliding price of gold and higher production costs have left them struggling to meet the demands of labour unions. As such, we could be in for a prolonged period of uncertainty for the South African mining industry unless companies and unions can show that lessons have been learnt from last year’s episode and move quick to mitigate violence and the loss of life.
This commentary was provided by Ishaq Siddiqi of ETX Capital.