Market News 10 July 2020

What we know

 

It’s once again been a quiet news week, with markets around the world continuing to consolidate and the ZAR managing to gain about 1% against the USD. Although we drifted weaker to touch 17.21 on Wednesday morning, the resilience of the Rand (coupled with a struggling USD) saw a rally of more than 2% to touch 16.80 early yesterday afternoon. Thus far we’ve managed to hold on to most of the gains, trading at 16.84 at the time of writing.

Uncertainty as numbers rise

When the pandemic kicked off at the beginning of the year, it was clear that things would take quite a while to settle down, let alone improve. Still, many would have been hopeful that, by now, there would have been a bit more clarity and consistency regarding the information being relayed by the World’s political and scientific leaders. Alas…

It does seem as though the WHO continues to struggle with the defining of, and guidance against, the virus. This week the debate focused on the extent to which the coronavirus is capable of airborne transmission or not, with many scientists urging the organisation to acknowledge evidence that may prove so. At the same time, the US made the not unpredictable move to start its formal withdrawal from the WHO.

While some countries still seem to have a reasonable grip on things following early victories (Germany and New Zealand being good examples), others such as Australia and Israel have seen infections start to rise again. Australia announced that over 6 million people would be impacted by the state of Victoria having its borders closed, while Israel is seriously considering re-imposing previously lifted lockdown restrictions. The US never got a conclusive grip on the virus, so their recent spike (highlighted last week) is less surprising. Locally things really are kicking off in terms of infection rates, what Health Minister Mkhize is referring to as “the surge”.

Elsewhere, Brazilian president Bolsonaro became the highest profile leader to test positive since Boris Johnson.

Really, Eskom, really?

Last week we had a little rant at China for ruining our 2020 and this week it’s the turn of Eskom who have “decided” to choose the middle of winter, in the middle of an economic crisis, in the middle of a global pandemic, to start load-shedding again. Now there is little indication that this is the start of an extensive schedule of power cuts similar to earlier this year; however, it’s clearly not an encouraging sign. Should the situation deteriorate further, one really has to worry about how bad things may get.

We don’t understand this!

Even though we’re at much higher levels than earlier in the year and we continue to hear that the Rand is 15% – 30% undervalued, we are confounded by its bullet-proof behaviour of late. Again we have to repeat that while the fairly dire global picture and weakening USD may mean that relatively speaking we’re not too bad off (because things are k*k everywhere!), we believe that recent trading levels should not be holding.

Indeed, whereas in far simpler times even rumours of load-shedding could cause a sell-off (even if it turned out to be a short-lived knee-jerk reaction), this week’s prospect of new load-shedding causing further economic, social and health issues at a time when we can ill-afford it, has seen absolutely no market reaction.

 

What others say

6 July 2020

Zero Hedge – Is this the real reason for China’s massive market meltup?

“Now that Hong Kong is facing a creeping monetary boycott by the US, and more importantly, by the US financial system as a result of its de facto annexation by China, a pesky question has emerged: how will China procure those much needed dollars which are oh so critical to keep the Chinese financial system, all $40 trillion of it, functioning smoothly.”

7 July 2020

MoneyWeb – Consumer mood drops to 35-year low during lockdown

“South African consumer confidence fell to a 35-year low in the second quarter, when restrictions aimed at curbing the spread of the coronavirus pandemic kept all but essential workers at home and weighed on output.”

8 July 2020

BBC News – Chancellor gives diners 50% off on eating out

“He added that the cut in VAT, from 20% to 5%, would apply to “eat-in or hot takeaway food from restaurants, cafes and pubs; accommodation in hotels, B&Bs, campsites and caravan sites [and] attractions like cinemas, theme parks and zoos”.”

9 July 2020

Reuters – US recovery in limbo as retail traffic falls in virus hot spots

“The result is an economic reopening that appears to be, at best, in limbo, according to an array of high frequency data and broader analyses prepared by economists and the U.S. Federal Reserve.”

10 July 2020

Bloomberg – H.K. set to shut schools; Australia limits travel

“Australia will tighten inbound travel and Hong Kong is set to close schools as governments react to spiking infections in the coronavirus outbreak.”

 

What we think

 

Last week we wrote that “in the short- to medium-term we just cannot shed our caution with regards to the numerous risks that the World and global economy face. Put another way, in addition to South Africa’s challenges and bleak economic outlook, the possibility of a sell-off due to any number of possible global shocks leaves us feeling as though complacency is just too high at the moment.”

Very briefly: we should not be trading down here. Even though we’re not that far below the 16.90 level which represented our forecast low for the week, given our bias remains for a move weaker we struggle to understand why traders would be happy to push the ZAR stronger under current conditions. The possibility of load-shedding becoming an issue in the coming months only serves to increase our conviction that a pull-back is due.

Our range for the week ahead remains 16.90 – 17.30.

 

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Have a great weekend!