SA40 Forecast: Softer Commodity Prices Weigh on the Index, CPI Breaches 6%

• Softer commodity complex contributes to the index’s decline
• SA CPI breaches upside target of 6% - currency effects analyzed
• Key SA40 technical levels for consideration

Resources help send the SA40 lower

Crude oil trades lower today after yesterday’s sizeable drop in the price which has resulted in losses for Sasol (the largest loser at the time of writing) down nearly 5%. Miners like Glencore, Impala Platinum Holdings Ltd, Gold Fields and AngloGold Ashanti Ltd have followed suit as gold and platinum prices continue to move lower.

The only solitary share trading in positive territory at the time of writing is British American Tobacco, edging out a 0.2% gain. The index continues to be subject to the fate of major global equity indices like the S&P 500 and general risk sentiment as equities endure the current period of tighter monetary policy – which is historically negative for stock indices.

Key inflation target breached and all eyes on Jerome Powell

Today we saw a rather sizeable surprise in inflation data for May, coming in at 6.5% vs the forecast figure of 6.2% and previous reading of 5.9%. The South African Reserve Banks target band ranges between 3-6% meaning that if inflation persists above the target, the Monetary Policy Committee (MPC) is likely to move towards further rate hikes. Higher rates tend to see weaker equity valuations and prices and therefore, does not bode well for the index over the medium term. In addition, Jerome Powell is set to conduct his twice-yearly monetary policy report to the US Senate and revelations out of the two day session could have ramifications for global equities and, by extension, the South Africa 40 Index.

Key SA40 technical levels

While the index has struggled to rise consistently, it also appears to have consolidated somewhat, pausing the longer-term downtrend. Recent price action has been seen oscillating largely between 60.910 and 58,980. A breakdown of the current consolidation sees support come in at 58,315 which isn’t too far off the 61.8% Fib level of 58,220, followed by 57,200. Immediate resistance appears at 60,910, followed by the ascending trendline resistance and the 62,280 level.

Daily SA40 chart

The weekly chart shows the larger picture for the index. There is still a fair distance to travel before the major level of resistance (55,286) throughout 2020 makes its way into focus. As with most global equity indices, the trend appears to support selling rallies as global monetary policy continues to factor in further rate hikes – which tend to be negative for equity indices.

Weekly SA40 chart