Market News 8 May 2020

What we know

 

The theme for the past week was “Back to Work………kind of” as countries across the globe grappled with the issue of how to slowly reopen their economies. While it’s interesting to watch the various theories and strategies unfold in real-time, it’s going to make for an absolutely fascinating analysis in history classes 30 years from now!

Opening up falling economies

With 6 months to go to the US election, one can’t help but wonder whether that is now (if it wasn’t before) Trump’s most important concern. Indeed his decision to disband/restructure his COVID-19 task force seems very hasty and premature and only time will tell how his encouragement of the different states to open will play out.

New Zealand believe they have beaten the virus for now, while Australia also appears to be fairing fairly well. Germany sees fit to restart their soccer league in a week or so and Spaniards and Italians are slowly enjoying the sunshine again. It’s expected that the UK will also announce some easing tomorrow. We also watch Brazil, India and Nigeria closely as countries which may be grabbing the wrong headlines soon.

In SA the reaction to Level 4, both theoretical and in practice, has been very mixed. There seem to be many illogical decision and contradictions in, and implementation of, government’s plans and frustration on the ground is increasing. Some examples include:

– The U-turn on cigarette sales
– You can buy a jersey but not underwear
– You can exercise, as long as it’s at a certain time with many other people
– Uncertainty whether it is an offence to be outdoors without a mask
– Police heavy-handedness in monitoring compliance
– Outright ban on alcohol, rather than increasing alcohol tax to reduce consumption AND keep that revenue source for government
– Continued uncertainty and agreement regarding schools reopening

We’re not suggesting this is an easy task; however, it seems as though consensus is growing that our initial lockdown was perhaps too extreme, too soon. Furthermore, it is clear that we are weeks away from seeing the infections really pick up and, in turn, the extent to which our healthcare system will be able to cope.

Globally, the need for the concerted efforts to get the economy going again was seen in the data released during the week. Without going into specific numbers, the trends are:

– Unemployment sky-rocketing, be it in the US, the UK or China
– GDP forecasts in the negative double digits are becoming the norm
– Business confidence indicators have plummeted (for SA this week’s figure was a record low)
– Government debt ballooning and the spectre of massive inflation lying ahead

None of the above is unexpected; however, we do sometimes find it strange that the market reacts so strongly to numbers that come in even worse than the already pessimistic expectations: things are bad, really bad, but there is also so much uncertainty and room for error, that the current trend and implications (which are well known and should be reasonably priced in) are surely more important than the exact number released?

ZAR consolidation continues

It seems strange to feel relieved that the ZAR traded in “only” a 50c range against the USD this week; however, such has been the volatility of late, that we’ll grab such calm with both hands. There were still opportunities for both our importing and exporting clients to transact at attractive short-term levels, albeit that the market felt a bit less schizophrenic than it has of late.

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). On the week the EUR was the relative loser of the three majors.

As for the ZAR, the consolidation we’ve seen since early April remains firmly in place.

After March’s sharp sell-off and the 19.35 high, it’s clear that the trading range has been 18.00 – 19.00. As that range starts to narrow, as shown by the convergence of the two horizontal lines, the likelihood of a break-out in one direction or the other increases. For now however, we’re slap bang in the middle of that range with a very neutral view.

While we had a slightly stronger week than most of our Emerging Market peers, over the past month we’re very much in the middle of the pack – Brazil is the major standout as a significant loser.

 

What others say

 

4 May 2020

Money Web – Bad start to May is a sign of things to come for market

“For all the optimism stemming from the gradual easing of lockdown measures in some of the biggest economies, there are too many worries on the minds of traders to sustain the momentum from last month. The fear of a second wave of infections, the collapse in corporate earnings and the shocks reverberating from the economic data are toxic enough. Now throw in a fresh eruption of political sparring between the US and China.”

5 May 2020

Business Maverick – SARS commissioner sees 15%-20% revenue shortfall due to COVID-19 lockdown

“April 2020, as expected, was a dire month, with a revenue shortfall of R9-billion, or 8.8% compared to this time last year. PAYE was down 5.2%, domestic VAT collection was 4.3% lower, import taxes declined almost 20%, and excise taxes fell a whopping 54% or R1,3-billion. These, of course, include sin taxes on booze and smokes.”

6 May 2020

MoneyWeb – Emerging-market watchers say another sell-off approaches

“Emerging-market investments have seen a significant bounce back from their initial coronavirus sell-off, with the MSCI Emerging Markets Index posting its biggest monthly gain in four years in April. Sentiment has been boosted by optimism about potential drugs being developed to fight the pathogen, global stimulus efforts and signs that global lockdowns are easing. While the outlook remains volatile, the majority of the respondents still see gains in all three asset classes by year-end.”

7 May 2020

Reuters – As U.S. states start to reopen, Fed official sees little sign of resurgence

“Though states have begun to reopen their economies, it is not clear consumers are ready to venture back to the marketplace, Atlanta Federal Reserve Bank President Raphael Bostic said on Thursday, citing conversations with business officials in his region and his staff’s study of cellphone tracking data.”

8 May 2020

Bloomberg – Africa’s wealthiest city says 1 million people need food aid

“While South Africa has less than 9,000 infections, it’s still one of the highest numbers on the continent. The government imposed a lockdown late March that shuttered schools and businesses and only allowed essential workers out of their homes. Today, about 300,000 households in Johannesburg require food assistance, mayor Geoff Makhubo said in an interview.”

 

What we think

 

Last week we wrote that “we saw a rampant Rand that seemed impervious to any selling for almost the entire week and suddenly…(on Friday) afternoon over half of that was undone…(and we were) really not sure where this came from…We’re not going to overthink this right now, as it does seem that the only certainty is going to be continued volatility. Our range for the week ahead is 18.30 – 18.75.”

We were glad to see volatility taper off ever-so slightly this past week and as a result our range covered virtually the entire week’s trading. The main ZAR sell-off we saw was in response to Wednesday’s poor US employment number and indeed we await the release of Non-Farm Payrolls later today. Outside of this however, the ZAR continues to feels as though it wants to trade with a firmer bias (whether we believe this is justified is another discussion) and in the absence of any surprising news or developments this could continue to be the case in the short-term.

Our range for the week ahead is 18.20 – 18.60.

 

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Have a great weekend and stay healthy!