June 07, 2021
Market News 07 June 2021
What we know
Friday’s US unemployment data, which were lower than expected, are still having an impact. Their effect was like that slapstick comedy moment when a clown holding a plank turns and inadvertently whacks his friend on the side of the head. Just as the “straight man” gets back on his feet, the clown turns again and whacks him on the other side. In this case, the first thump came with the data, the second with market reaction that in some ways was almost the opposite of what might have been expected.
Core financial conditions behaved the way they were supposed to. Real yields, arguably the ultimate sign of easy monetary conditions, dropped back again and are now once more below the trough reached before the “taper tantrum” of 2013, which was the historic low until Covid. Real yields had risen as investors positioned for a robust post-pandemic recovery, and many braced for a repeat of the sharp increase seen during the tantrum. Such an event has at least been postponed.
In these crucial respects, the market reaction has been just as might be expected after disappointing economic data — people adjust their forecasts and position themselves for easy monetary policy long into the future. As a result, financing gets easier to obtain.
Small businesses in particular seem to have a problem lining up appropriate people. The next report from the US National Federal of Independent Business, a lobby group for smaller companies, is due Tuesday. Friday’s whack around the head from the unemployment report has just sharply increased the importance of that NFIB survey. And then Wednesday will bring the official CPI data themselves from both SA and the US. There could be plenty more opportunities for clownish activities with a plank this week.
The South African Rand on the other hand rallied to its highest level in more than two years against the dollar on Friday, as it continues its strong run on the back of a sustained rebound in global economies and the attractive carry trade. The recent ZAR spot movements are baffling, especially for fundamentalists and seasoned Rand traders who have reverted to technical analysis for guidance. It isn’t so much the Rand’s level but rather the uncharacteristic speed at which it has appreciated over a short period of time.
What others say
Bloomberg – If Covid did escape from a Wuhan lab, brace yourself
“But here’s where one might worry. Research on risk perception shows that we tend to fear human-made harms more than natural ones, even when the natural ones have greater likelihood or severity. Some research suggests that human-made harms make us angrier too.”
MoneyWeb – SARS puts crypto exchanges under the magnifying glass
“According to SARS, the purpose behind the request, which has reportedly been sent to AltCoinTrader, Luno, and VALR, is for risk analysis and which would determine whether any further action would be taken. The information requested includes transactional information in relation to certain customers.”
Financial Times – G7 strikes historic agreement on taxing multinationals
“The detail of the first part of the agreement, a significant US concession by the Biden administration, made it clear that “the largest global companies” with profit margins of at least 10 per cent would, in future have to allocate 20 per cent of their global profits to countries where they make their sales.”
Economist – Is a commodities super cycle under way?
“Some excited analysts have been quick to proclaim a new commodities “super-cycle”, a prolonged period of high prices. To support their theory they cite resurgent economies, growing enthusiasm for the sort of “green growth” that devours minerals, and supply shortages.”
What we think
Last week we stated “…emerging markets remain in favour as global markets continue to heat up as pent-up demand is finally realised”.
Underscoring the positive stance on the Rand is the view that the country has undergone a positive Terms-of-Trade shock, i.e., South Africa is now earning a great deal more than it spends on imports, creating a supportive dynamic for the currency’s value. Commodity prices have risen sharply as the world recovers from the Covid-19 pandemic, in part helped by substantial stimulus programmes in the US and China.
Also aiding commodity prices – particular that of Rhodium – is the ongoing march of the ‘green revolution’ which raises demand for various metals. South Africa is the leading Rhodium producer on the planet and the importance of this metal to South Africa’s economy has been vastly understated in the past.
The longer the dollar prices for some of South Africa’s core exports hold around multi-year highs (e.g., platinum and iron ore) the more receptive markets are to price in the possibility of notable improvement in the outlook for South Africa’s dollar-GDP and the country’s fiscal balance, particularly as the government remains committed to prudent management of government spending.
The threat to the Rand’s constructive outlook, in our view, is a change in global market conditions, possibly involving a signalling for interest rate policy tightening by the US Fed which would aid the US Dollar. In the coming week, we will be wary of developing local news which could impact sentiment at the margin, with the jarring claims of corruption around PPE and fresh headlines on land expropriation.
Our range for the week ahead R13.45 – R13.80.
Have a great week!