February 07, 2020
Market News 7 February 2020
What we know
Despite elevated intraday volatility this week, the ZAR was actually reasonably well behaved, given the current global nervousness around the coronavirus and general heightened risk aversion. We started and (at the time of writing) ended the week at just under 15.00 to the USD, while in between briefly trading as low as 14.67.
Truth be told, most of the action this week has revolved around a strengthening USD as much as anything, with the dollar-index trading at its strongest level since late November. This is of course to be expected during times of perceived heightened global risks.
News around the outbreak continues to be puzzling. It’s well known that the Chinese government likes to deal with matters in its backyard on its own and many are sceptical as to what information is and isn’t being shared with the rest of the world. As a result, while we listen to official figures being released on the news channels, many conspiracy theories are popping up, some suggesting nefarious human involvement in the virus’s creation and other suggesting that the true rates of infection and mortality has been massively downplayed.
In the age of social media and fake news, it’s understandable that many people simply don’t know what to believe (in such situations, we typically take a middle-of-the-road approach in trying to assess the impact we may see going forward). What is clear is that there will be a drag on global travel, demand for goods and economic growth, given the size of China as both a consumer and supplier within the world economy. Only time will tell the extent of this.
We also saw the first week of post-Brexit UK/Europe relations and both sides clearly felt a need to take a hard-line stance at the beginning of 11 months of negotiations (this is a negotiation after all so it would make sense to start from fairly extreme positions and begin the arm-wrestling from there). The market, however, did not take kindly to Boris’s strong words and GBP has been under pressure most of the week. We do believe that there will be enough co-operation to ensure that some kind of deal is concluded and that it won’t be a worst-case/no deal/hard Brexit scenario. This makes us somewhat bullish on the prospects for GBP at current levels.
For our local comment, we’re simply going to leave an extract of a piece by David Gracey (Investec Bank) from yesterday:
When I attempt to do a basic SWOT analysis for the Rand, I can only find two (perhaps only one and a half) “OPPORTUNITY” factors for our local currency.
1. We do offer attractive yields relative to the developed world.
2. The Rand is arguably marginally undervalued.
However the “THREAT’ box is filled to bursting.
1. Government finances
2. Some SOE’s that are technically insolvent – thus adding to the pressure on Government finances through Government guarantees.
3. Stagnant GDP growth in nominal terms and negative in real terms.
4. Continuously rising unemployment from already alarming levels.
5. Collapsing services.
6. Expropriation without compensation, with no clarity on exclusions and who will govern the process.
7. National Health Insurance.
9. Rising emigration.
10. Declining tax revenues.
I could add to this list, but if I continue we may need to hide the razor blades. And so with every passing day my bewilderment grows as I watch the Rand follow its Emerging Market peers around – and I cannot help but think there is something wrong. At some point the realities of SA’s dire economic position and prospects must be realized.
• We cannot go on as if everything is rosy.
• We cannot borrow our way to prosperity.
• We cannot go on making promises that cannot be delivered on.
In my opinion the market has it completely wrong. In its desire to find yield it is underestimating the idiosyncratic risks associated with South Africa.
What others say
3 February 2020
MoneyWeb – Rand firms following slide on virus fears
“Investors concerned about the spread of the coronavirus wiped more than $400 billion off the value of China’s stocks in the first trading session in two weeks, after an extended Lunar New Year holiday break. The death toll from the outbreak has exceeded 360 people.”
4 February 2020
Business Maverick – Mining in South Africa: It’s all downhill
“Mining production has not improved significantly since 2009. Structural and logistical constraints such as limited rail and harbour capacity, the increasing cost of and disruptions in electricity supply and, industrial action and community unrest are the main contributing factors,” the council said.
5 February 2020
MoneyWeb – EM assets continue recovery but caution still remains
“The People’s Bank of China said on Tuesday that its huge liquidity injections through open market operations this week showed its determination to stabilise financial market expectations and restore confidence.”
6 February 2020
BBC News – China halves tariffs on more than 1700 US goods
“This latest announcement to reduce tariffs is China’s first response to the “phase one” agreement. China’s economy has been under additional pressure this year as the coronavirus outbreak threatens to derail the economy. Factories across the country remain closed and its manufacturing sector faces a severe drop in production.”
7 February 2020
Bloomberg – U.S. Hiring Momentum May Endure Even as Pace Trails Last Year’s
“Labor Department data due at 8:30 a.m. Friday in Washington will show 165,000 jobs were added in January as private hiring rise to 155,000, according to Bloomberg’s survey of economists. The jobless rate is seen holding at a half-century low of 3.5%, while annual wage growth improved to 3% from a 17-month low of 2.9%.”
What we think
Last week we wrote that “while our call for a weaker ZAR over the past 2 months has been consistent and is finally coming to bear, we cannot say it’s for the reasons we had in mind….at times like these our ranges will necessarily be wider than usual and our outlook for the week ahead is 14.50 – 15.00.”
So here we are, still at 15.00 to the USD. It does appear as though the 14.70 level has now turned into a support level preventing further ZAR strength beyond that (certainly in the absence of positive coronavirus developments). Add to that the list of threats outlined by David Gracey in the first section and it’s hard not to be fairly bearish at present. Next Thursday sees President Ramaphosa present his State of the Nation address and two weeks later Tito will have his turn at the podium. It’s going to be very interesting indeed.
Our range for the week ahead is 14.70 – 15.15.
Have a great weekend!