June 05, 2020
Market News 05 June 2020
What we know
Well, we didn’t see that coming. Having started the week at around 17.45 vs the USD, at the time of writing we have reached as low as 16.73, a gain of around 4.3%. This means that we have now seen three consecutive sets of weekly gains, bringing the rally since 18 May to 11%. While the main driver has remained an overall improvement in sentiment and risk appetite, and the ZAR gained against most major currencies, a weak USD was possibly the biggest feature.
Economic recovery as lockdowns ease
There is little to add here that hasn’t been said in recent weeks and the market moves speak for themselves. Commentators are suggesting that as things start to improve and economies start to reopen, the worst is perhaps behind us. Maybe they’re right; however, to us this still seems as though investors are getting ahead of themselves. We have two respected individuals who wrote pieces that share our views and we quote them here:
David Gracey, Head of Fixed Income and Currency Trading Desk, Investec:
“The DOW for example has climbed back from its low point of about 18 000 to currently trading close to 26 000 – a rise of close to 45%. Does this make any sense in a country where +-30 million people have recently lost their jobs? Now I know that Trump is doing everything to re-open the economy as soon as possible, but does it make any sense that the DOW is only some 3 000 points off its record highs set earlier this year?
Even as the civil rights riots have gripped large parts of the U.S., markets have continued to power ahead! Even as China/U.S. relations continue to deteriorate, markets continue to power ahead! Even as companies enter bankruptcies on an unprecedented scale, markets continue to power ahead!”
Mark Brijder, Treasury Sales – Global Trading and Investments, Bidvest Bank:
“…we just need to be mindful when this sentiment starts slowing, as the door seems very narrow when all positioned the same way. Economies are getting back to work but they will be fundamentally weak. Strategy for now is join the herd at the back at the back of the queue and be ready to run.”
US of Anarchy
While the coronavirus is clearly not going anywhere anytime soon, the chaos on the streets in the US took centre stage this week. Racial inequality, triggered by recent incidents of police brutality and murder of black males, has come to the fore with widespread protesting taking place. This in turn escalated into looting, rioting and further violence over the past few days. While all these grievances are real and there are very specific issues being protested against, there must surely been an element of people having reached tipping point and becoming completely gatvol of Trump’s utterly reprehensible display of his brand of “leadership” over the past few months. Indeed it is almost universally accepted that his current approach to the protests and his threats of substantial force, have only worsened the situation.
It has been laid bare that his approach is to simply speak and ignore facts, and in that way, whatever he says and thinks simply becomes the truth. It’s obviously worked for him in the past and he has steam-rolled his way to where he now sits; however, there are now signs that this strategy may have run its course. Indeed, this week saw Joe Biden – not seen as an amazing Democratic Party candidate by any means – become slight favourite to actually win November’s election.
USD under pressure, helping the ZAR rally continue
On 8 May we wrote that “The USD continues to trade in a fairly tight range against a broad basket of its trading partners; however, one suspects that we will see this change over the coming months as the global situation hopefully becomes clearer – we suspect that if/when things calm down, the USD will come under pressure: the US has been particularly hard hit by the virus, they have pumped trillions of dollars of liquidity into the market and we have 6 months of electioneering to look forward to (between two uninspiring candidates).”
The previous sections described factors that would be considered USD-negative. We have mentioned before that the USD will typically sell-off as global risk appetite increases, and the domestic situation is only making matters worse, especially as we are now only 5 months away from an election with a very uncertain outcome. Indeed, the USD has lost 1.5% this week against its major trading partners, meaning it’s lost almost 3% over the past month. The EUR was the big winner this week, helping by the additional EUR 600 billion of stimulus announced by the ECB yesterday.
What others say
1 June 2020
Business Live – Vaccine developers face poser in countries where pandemic is waning
“Among the first Covid-19 vaccines to move into phase two, or mid-stage, trials is one from the US biotech company Moderna and another being developed by scientists at Oxford University supported by AstraZeneca. The US is planning to launch vast efficacy trials of 20,000 to 30,000 volunteers per vaccine in July.”
2 June 2020
Zero Hedge – This is not a revolution. It’s a blueprint for locking down the nation strategy
“The Justice Department is deploying federal prison riot teams to various cities. More than half of the nation’s governors are calling on the National Guard to quell civil unrest. Growing numbers of cities, having just barely emerged from a coronavirus lockdown, are once again being locked down, this time in response to the growing upheaval.”
3 June 2020
Fin24 – ‘We will have to live with this COVID-19’: Experts weigh in on SA’s post-virus economy
“The world economy will not be the same again and the SA economy would not be either,” he said. This is the worst crisis the domestic economy has faced since the global depression back in the 1930s, the latest growth estimate by the Reserve Bank indicates a contraction by 7% for 2020. Treasury projects a worst-case scenario contraction of 16.1%.”
4 June 2020
CNN – The electoral map is tilting badly against Donald Trump right now
“Amid the protests following the police killing of George Floyd and the ongoing fight against the coronavirus pandemic, something very important has been overlooked: President Donald Trump is now a decided underdog to reach the 270 electoral votes he needs to win a second term in the fall.”
5 June 2020
Bloomberg – Three charts that show Asia risk assets eclipsing the dollar
“Indonesian bonds, a barometer of risk appetite for emerging markets, have erased losses. Optimism is rising about the reopening of economies even as a growing spat between the U.S. and China threatens to set off another trade war.”
What we think
Last week we wrote that “Since the global lockdowns and market turmoil began, we have maintained that when things start to settle down and confidence begins to return, that the new normal for the Rand could be in a 16.00 – 18.00 range…and we thought that such a situation was probably 12 – 24 months away. In other words the discrepancy between our view and the way the market has responded over the past couple weeks is more to do with timing and the return of risk appetite than what the “right” level is for the Rand. We believe that there is still too much risk and uncertainty, at both a local and global level, to justify trading in the low 17.00’s.”
There are quite a few commentators who have called the continued ZAR rally correctly, in contrast to our views over the past few weeks. Typically they cite a fundamentally undervalued Rand (the purchasing power parity metric being most commonly referred to) and the easing of our comparatively severe lockdown restrictions. We continue to take the stance the Rand should not, in the context of what we currently know and with all things being, be trading in the low 17.00’s, let alone the 16.00’s (or a medium-term target of 15.50 that we’ve heard elsewhere).
It’s never particularly nice to be wrong in regards to one’s view and opinions; however, this won’t stop us from continuing to question the extent of the current rally, even in the face of such strong momentum, and we still expect a return to the 17.80 level in the coming weeks.
Our range for the week ahead is 16.80 – 17.30.
Have a great weekend!