Market News 03 July 2020

What we know

 

There are certainly times when it feels as though there’s not too much new to write about, making these commentaries somewhat of a slog. Unfortunately, today is one such occasion as, despite a very good week for the ZAR, there was little new or particularly inspiring insofar as the drivers of the move were concerned.

A good week for economic data

Without looking into every number, the data releases were broadly encouraging compared to the previous month’s figures as well as market expectations (first quarter data of course included pre-corona data, so perhaps was harder to assess). The two obvious caveats in reading through most data are a) the base has been set very low in recent month’s due to the damage caused by the virus and b) the significance of such short-term data points in the context of far greater long-term and structural damage is hard to quantify (i.e. at what point are we really seeing “green shoots” in the economy?).

Nevertheless, markets are currently happy to take any positive signs there may be and this would have added to the improved market sentiment we’ve seen.

A bad week for the US

For anyone following the political, social, economic and health-related turmoil in the US, it’s almost unbelievable to see how dire the general state of things have become. How much of the blame can be placed on Trump is up for debate; however, it is nearly impossible to imagine any other significant global leader having been as arrogant, divisive and inept as he has been over the past few months. Indeed he is now being given only a 35% chance of being re-elected in November (it’s important to note that he overcame far worse odds in winning his first-term).

The most important chart we’ve seen this week in terms of the short-term outlook for the US, and of course how that may impact on global economies and markets, is shown below. Trump’s initial arrogance, neglect, ignorance and deception (we could have gone on here!), is now coming back to bite, as the country clearly struggles to get to grips with containing the virus.

Really, China, really?

If any of our readers have PhD’s in global politics and strategy, please do be in touch to give us your thoughts on China! For years the country has been a major force in driving the global economy and in so doing, helped the development of so many developing economies and countries. This despite questions around its human rights practices and scepticism regarding freedom of speech and the flow of information.

Perhaps it’s fitting then that 2020 is the Chinese year of the Rat, given it’s thus far been mostly about spreading disease. Whether China is using attack as the best form of defence or sees the current global instability as providing an opportune time to assert itself, it seems to be trying to raise diplomatic tension far and wide, be it with India, Japan, the USA or Australia, or its more specific actions regarding Hong Kong.

Clearly the World does not need an escalation in global tensions at this time.

Rand bulls winning

While much of the recent Rand performance and commentary has been primarily attributed to the fortunes of the USD, that’s not quite been the case this week as the USD has been reasonably stable. Perhaps it’s the better economic data mentioned earlier, the ZAR correlation with US equity market gains, or optimism around more headlines concerning positive early vaccine trials – we’re not quite sure. However, we were surprised by the move below 17.15 all the way down to 16.88 and are more comfortable that, at the time of writing, we have just moved back above 17.00 to the USD.

 

What others say

The Diplomat – Interpreting China’s ‘wolf-warrior diplomacy’

“In recent years, President Xi Jinping has advocated “a fighting spirit” on several occasions, whether speaking to soldiers or party officials. This has apparently raised the morale of Chinese officials and diplomats, and encouraged a more assertive style.”

30 June 2020

Daily Maverick – Boris Johnson’s imminent lifting of the lockdown doesn’t mean it’s time to celebrate or throw caution to the winds

“From Saturday 4 July, businesses, restaurants, bars, cinemas and hotels will be able to reopen in England, along with places of worship, libraries, community centres and outdoor playgrounds.”

1 July 2020

Bloomberg – A Biden election win is ‘best possible outcome’ for dollar

“The dollar strengthened in the 100 trading days after nine of the past 10 elections from 1980 to 2016, according to Richard Falkenhall, a senior foreign-exchange strategist at SEB AB in Stockholm. The currency performed better following Democratic wins, rising an average 4% after these votes versus about 2% when Republicans prevailed, he said, noting that the 1984 and 2008 votes were excluded from this calculation due to outsized drivers beyond the election.”

2 July 2020

Reuters – US job growth roars back, but COVID-19 resurgence threatens recovery

“The flare-up in the respiratory illness, which started in late June and hit bars and restaurants hard, was not captured in the Labor Department’s closely watched monthly employment report published on Thursday because the government surveyed businesses in the middle of the month.”

3 July 2020

BBC News – Coronavirus: Quarantine scrapped for arrivals from ‘low risk’ countries to England

“The new exemptions mean people arriving from selected destinations will be able to enter England without needing to self-isolate, unless they have been in or transited through non-exempt countries in the preceding 14 days.”

 

What we think

 

Last week we wrote that “The fact that there were no major nasty surprises (in the budget revision) also means that a potential risk event has now passed fairly uneventfully. As such, we suggest that while we do still favour a move higher towards 17.80, our conviction is not as strong as in recent weeks.”

The easy option for us would be to say “if you can’t beat ‘em, join ‘em” and get more bullish on the ZAR; however, we just cannot do that in the current environment. Yes, the ZAR may be undervalued according to economists’ valuation models and yes, the economy is opening up and the virus has not overwhelmed the country as things stand. However, in the short- to medium-term we just cannot shed our caution with regards to the numerous risks that the World and global economy face. Put another way, in addition to South Africa’s challenges and bleak economic outlook, the possibility of a sell-off due to any number of possible global shocks leaves us feeling as though complacency is just too high at the moment.

Our range for the week ahead is 16.90 – 17.30.

 

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Have a great weekend!