Stormy End To Calm Week

What we know

 

It was all quiet on the Southern Tip for most of the week, until a sudden slew of data, announcements, and an ANC-curveball sent the ZAR reeling.

Having opened Monday at 14.16 on the ZAR.USD, we started the week trading a relatively tight range of 14.11 – 14.26 all the way up until mid-morning on Thursday. Indeed, for virtually the whole of Wednesday’s trading session, we traded in a tiny 4c range between 14.18 – 14.22. It really didn’t feel as though it was the Rand we were watching. By the time of writing, how we wish we could rather have those “boring” levels back again!

Yesterday afternoon’s sell-off was the culmination of three main events:

1. The NERSA announcement regarding Eskom’s tariff hikes. We felt that this announcement was always going to be somewhat of a lose-lose situation. Should NERSA have granted Eskom tariffs at or close to their demands, the strain on the consumer and economy at large would do no favours to economic growth. Should the hikes have been much lower than those requested (as they turned out to be), well, then we know who’ll need to pick up any further deterioration in Eskom’s financial well-being.
2. The reduced growth and inflation forecasts announced by the ECB, together with additional stimulus measures. In addition to the negative impact this may have on global growth prospects, the more immediate reaction was a move towards the security and more appealing yield of the USD, which rallied 1% as a result. At the same time, equity markets and emerging currencies found themselves under pressure.
3. The afternoon announcement from President Ramaphosa that the ANC government will nationalise the SARB. While such an announcement always needs to be treated with caution pending any actual detail, the market clearly did not take kindly to it. Indeed we have seen this before with regards to the issues of land reclamation and constitutional amendments.

We think Investec put it very well in their commentary this morning:

“Whether it be a fight to retain legitimacy as polling numbers deteriorate, or merely a function of the ANCs insatiable desire to control all levers of power, President Ramaphosas announcement in parliament yesterday that the government would press ahead with nationalising the SARB, hurt SA markets.

Ultimately, it now comes down to just how much constitutional protection the SARB will enjoy. This was a line the ANC-led government didn’t need to cross as it served no practical purpose. It is a decision that deserves to be criticised and condemned for its timing and political motivation. It detracts from Ramaphosa’s achievements thus far, and casts doubt on his abilities to withstand the populist faction from within the ANC. If this is about the political optics ahead of the elections, it smacks of desperation.

The ZAR is now on the defensive partly due to the surge in the USD post the ECB decision, but also because of this announcement. How far it goes will now depend on foreigners and how much political legitimacy Ramaphosa has built up through all his recent road-shows.”

 

What others say

04 March 2019

MoneyWeb – Investors Beware Of Smooth-Talking Politicians

“Two cases involving state-owned companies illustrate the perils of taking politicians at their world… The first involves Airport Companies South Africa (ACSA)… The second case involves SAA, a coddled state-owned embarrassment with a shocking history of driving competitors out of business.”

RMB Global Market Research – Headline A Wise Man Changes His Mind

“Nersa is scheduled to make an announcement on Eskom’s tariff application on 7 March. Eskom had originally applied for tariff increases of 15% over the next three years, but later revised its application upwards due to lower sales forecasts.

While Nersa is unlikely to award Eskom excessive tariff increase, higher electricity costs would deal a blow to consumers and energy-intensive sectors, which would be negative for the already subdued growth outlook.”

05 March 2019

Fin24 – Headline Morgan Stanley Keeps Faith In Some Of EM’s Worst Currency Losers

“Despite the recent pause in the EM rally, the model continues to have a positive bias toward the asset class amid dovishness across major central banks and expectations of further progress in the trade dispute between China and the US.”

Reuters – For Fed, Few Reasons To End ‘Patient’ Stance On Rates

“It may be several meetings of the Federal Open Market Committee before Fed policymakers have a clearer read on whether the risks are becoming reality – and by how much the economy will slow compared to last year.”

06 March 2019

IOL – SA’s Growth Factor Is Still In Contraction

“South Africa’s economy moderated to 1.4% quarter-on-quarter in the fourth quarter from 2.6% recorded in the previous quarter… With financial conditions having loosened, and inflation set to decline over the coming months, domestic demand should strengthen.”

DailyFX – Crude Oil Prices May Fall As OECD, BOC Feed Global Slowdown Fears

“Commodities were locked in consolidation mode yesterday. Crude oil prices attempted a foray toward the top of their two-week range, but the move fizzled intraday… Crude’s intraday reversal was probably helped along as Saudi state oil company Aramco cut prices on shipments to Europe.”

07 March 2019

MoneyWeb – More Pain Ahead As Nersa Grants Eskom 9.4% Increase For 2019/20

“Nersa granted struggling state power firm Eskom average power price increases that were far below what the utility had asked for, saying it aimed to balance the interests of the company and the public… Hike tariffs by 9.41% in the 2019/20 financial year, 8.10% in 2020/21 and 5.22% in 2021/22.”

Fin24 – Ramaphosa On SARB Nationalisation: There Is No ‘Manga-Manga’ Business

“South Africa’s ruling party has taken a decision to nationalise the South African Reserve Bank and it will be implemented… SA is one of only six countries in the world that still has shareholding in their central banks… The markets are perceiving this as undermining the SARB’s independence which is largely negative for the local currency.”

Market Watch – Why The ECB’s Surprise Policy Moves Sent Shivers Through Global Stock Markets

“The European Central Bank’s surprise policy moves in the face of a slowing global economy appeared to bring the danger home to investors… ECB extended its so-called forward guidance on ultralow interest rates, saying it doesn’t expect to begin lifting them until at least early 2020. That’s compared to its earlier plan to leave them on hold at least through the end of this summer.”

08 March 2019

RMB Global Market Research – Headline Growth Concerns Persist

“Given this much-reduced tariff determination, we question whether the R23bn per annum bailout that Eskom will be granted by National Treasury, as announced in the budget, will be sufficient. Liquidity concerns need to be addressed. But, so too, does maintenance capital expenditure in order to keep the lights on.

While the Nersa hikes are much lower than what Eskom wanted, they are significant enough to support the notion that the first of many issues at the power utility has been addressed – the revenue shortfall.

The effective front-loading of the tariff hikes should go some way in convincing Moody’s that the problems of Eskom as a contingent liability on the government’s balance sheet has been dealt with – though gradual, it is a positive first step.”

Daily FX – US Dollar Likely To Find Excuse For Gains In Jobs Report

“Job creation is expected to slow, with nonfarm payrolls posting a 180k increase after January’s hefty 304k rise… points to shrinking slack in the labour market, which could plant the seeds of doubt in the recent dovish shift in Fed policy expectations… A sense of urgency in boosting monetary policy support might have been expected to be cheered by markets pining for a rescue as global headwinds mount.”

What we think

Last week we wrote that “The weakness over the past 48 hours (from 13.82 to 14.13 at the time of writing) has caught us somewhat by surprise, albeit that USD strength in response to strong US economic data has been the apparent cause. We will keep a watchful eye on 14.20, as a move higher than this opens up the possibility of continued weakness to 14.40 – 14.50. We do, however, expect 14.20 to hold. Our range for the week ahead is thus 13.80 – 14.20.”

While our range did prove valid for most of the week, our call for 14.20 to provide resistance to further ZAR weakness unfortunately did not, despite putting up quite a fight. Once the level was decisively broken, the next range of 14.40 – 14.50 was fairly quickly reached.

As we often say following fairly sharp moves weaker, we would now rather take a wait-and-see approach rather than any knee-jerk reactions. We do suspect that these levels may be somewhat overdone and, while any recovery may not be immediate, we would rather keep an eye out for some kind of consolidation to offer guidance as to a short-term outlook.

Our range for the week ahead is thus 14.10 – 14.60. (ZAR.USD at the time of writing is 14.49).

 

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Have a great weekend!