Market News 1 March 2021

What we know

 

The ZAR displayed resilience in the wake of earlier gains last week, as Finance Minister Tito Mboweni set out a 2021 budget plan that appeared to be given a thumbs up by the currency market on Wednesday, before a bounce in the US Dollar led South African exchange rates to soften.

With the country becalmed with the twin doldrums of the COVID- 19 pandemic and a very weak economy, the minister didn’t have much wriggle room, but resisted in imposing an austerity budget. On the contrary, he sounded somewhat upbeat about future prospects, predicting a 2021 growth rate rebound of 3,3%.

It was painful to read the newspapers during the week before the Budget speech by the finance minister: doom and gloom everywhere. Is there one economist who did not forecast tax increases to pay for the COVID- 19 vaccinations? The finance minister surprised friend and foe by sticking to his guns – by not surprising us with a new tax on the wealthy, or a special tax for the vaccination process.

Rather, emphasis was placed on getting the country’s ‘house in order’ with a plea for greater financial discipline and sustainability – let’s see if these lofty ideals can be translated into practice by the more than 200 errant municipalities and SOE’s that have enjoyed more than R168bn in bailouts since 2009. No mention was made of the individual liabilities of Eskom or the R10bn SAA vanity project.

As with most finance ministers, you give with one hand and take back with the other. The good news for low- and medium-income earners will be that they should have a little more in the kitty, as the tax brackets have been increased by 5% which will equate to earners having a collective R2,2bn more disposable income.

The bad news is that excise duty on wine, beer and spirits, and cigarettes will increase by 8%. If you drive a vehicle, you’ll pay an additional 27c/litre for fuel – 15c/litre general fuel levy and 11c/litre which will go to the bankrupt Road Accident Fund to help it balance its books. If you were looking for a silver lining, keep looking, but like the curate’s egg, this budget was certainly good in parts.

On the global front, emerging-market assets closed the week out of favour as expectations for tighter global monetary policy and a revival of inflation reduced the relative appeal of risk assets. The surge in US yields is reminding many of the “taper tantrum”, when the Federal Reserve’s announcement that it would start winding back its quantitative-easing policy led to a spike in bond yields around the world. It appears as the market is pricing in a potential hike in rates in the latter part of the year – and just like in 2013, it is generally negative for EM currencies.

It’s about as hard right now to find anyone with a kind word to say about the greenback as it is to find someone with a nasty word about equities. There is much talk of yawning US budget and current-account deficits. Extreme fiscal policy has been added to extreme monetary policy.

Reasonable people might wonder about inflation and vertiginous asset prices, but reasonableness is seemingly not in high demand in Washington. The Treasury and the Federal Reserve seem to want to print as many dollars as they can. Inflation is going up and the dollar down. For any currency with a reasonable interest rate, carry has been king as investors borrow in dollars and other cheap currencies and snap up higher relative rates. The Rand has had a good run off the back of this.

Even though the relative move higher in US short rates has been meagre so far this year, an expectation of higher dollar rates has already steadied the greenback. If we get more numbers like last week’s US retail sales and producer prices, both much higher than expected, markets will bet that even the perennially dovish Fed will have to take note.

 

What others say

 

Business Live – Why global COVID-19 infections have plummeted

“In SA, meanwhile, infectious disease experts believe that very high levels of past infections, especially in poorer black communities, were likely to have created a natural barrier to new infections. They noted that a population does not need to reach “herd immunity” — the threshold of about 60%-70% required to prevent a disease from spreading — for some form of natural immunity to slow the spread.”

Financial Times – Trump teases supporters with hint of new presidential run 

“As the GOP squabbles over the way forward following its loss of both Congress and the White House, the Cpac event was an illustration of Trump’s enduring grass roots dominance. Conference goers repeatedly broke out into chants of “You won. You won” during the former president’s speech, much of which was devoted to false claims that the election was stolen from him.”

Forbes – Will rising bond yields crash equities and the Fed?

“The move is interesting because for much of the past ten years, central banks have managed to hold bond yields down by aggressive security purchase programs. Indeed, there has recently been talk of ‘yield curve’ control by the Federal Reserve.”

Daily Maverick – Tito Mboweni’s fine line divides ANC and its Cosatu allies

“Given the buy-in by the governing ANC, its alliance partners, such as trade union federation Cosatu, are left in a tricky spot. Criticise the governing ANC too much, and risk being associated with opposition parties. But at the same time silence on what’s regarded as anti-worker, anti-poor governing ANC decisions such as the 2021 Budget undermines Cosatu’s support base.”

 

What we think

 

Last week we stated that “how the Rand negotiates the coming days will reflect how the contradictory forces of a supportive global backdrop and the unsupportive domestic scene resolve.”

With the event risk around the budget now behind us, we are of the view that it will take a major event or extremely positive announcements for the Rand to erase the losses incurred at the end of last week. Yes, the budget instilled hope and confidence in the nation for the time being, but now we look at the ratings agencies which will have the next say, and their view could chart the next course the Rand.

Our range for the week ahead remains 14.70 – 15.10.

 

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Have a great week!