Market News 11 September 2020

What we know

While the size of the Rand swings have been relatively smaller than last week, the pattern continues to be complete yo-yo trading. A client asked yesterday what the current trend is and the answer is that there is simply no directional trend at present. Having recovered from the mid-17’s seen in the middle of August, the Rand is now consolidating in the 16.55 – 17.00 range, in a similar pattern seen in the second half of July.

 

A decent week given the data

On balance, it wasn’t a good data week locally, albeit that no one would have been particularly surprised.

While load-shedding was thankfully less of an issue this week, Tuesday’s GDP figure provided a reminder (not that anyone needs one) of the damage wrought by the virus thus far, with the 51% quarter-on-quarter contraction coming in worse than what the market expected. Although the Rand weakened 30c leading into and shortly after the release, to touch 17.00, thereafter it did rally somewhat, indicating that some traders had potentially placed bets on an even more dire outcome.

Although Mining Production and Business Confidence numbers were better than anticipated, the very large Current Account deficit for Q2 also saw a small Rand wobble.

 

Johnson goes full Trump

It was a particularly rough week for Sterling as the pound, following a good few months, lost around 3% against both USD and EUR, bringing the loss since last Tuesday to 5%.

The reason for the decline was two-fold:

1) The brazen admission that the government will prepare legislation that “will break international law in a very specific and limited way” with regards to the previously agreed Brexit deal. The response from Europe as well as many as the US, was quite rightly very scathing, suggesting that the long-term credibility and trustworthiness of the UK would be forever brought into question. Nancy Pelosi suggested that should the UK violate the international treaty “there, will be absolutely no chance of a US-UK trade agreement passing the Congress”.

2) Early signs of the UK needing to tighten Coronavirus-related restrictions, starting with the restrictions on group gatherings.

For clients who have been looking for an entry point into GBP following the 10% weakening we saw in ZAR.GBP from July into August, this current bout of Pound weakness may prove to be an opportunity, as we now sit at 21.45 compared to 23.25 a month ago.

 

Short-term consolidation

Not too much to say this week as this shaded green area illustrates the sideways consolidation we’ve seen over the past 2 weeks. Our technical expert actually favours a ZAR move stronger to 16.40 based on the pattern below; however, he is outnumbered by those of us who think the 16.55 level which has provided support over the past while will prove to have been the short- to medium-term best level we see. Click here.

 

What others say

Business Tech – South Africa’s 51% GDP number explained – and a ‘swoosh’ recovery

“It is likely that we will see a strong bounce back in the GDP in Q3 2020, he said. However, the economy’s return to its previous levels will not be reached easily, especially as businesses now take on the extra pressure and costs brought by load shedding.”

Daily Maverick – South Africa’s economic decline in detail – and the narrow path away from failure

“The prospects of mineral-rich countries are worse. Of the twenty-five, only two are developed – Australia and Chile. Three are middle-income – including South Africa. The rest (80%) are lower-income, highly fragile or failed. Half the mineral-rich countries are on the democracy spectrum. But the transition to democracy has not correlated with development nor lower fragility. No mineral-rich country is or has been developing while being non-democratic.”

World Politics Review – How America’s failed pandemic response sank the US dollar

“Early in the pandemic, financial markets behaved as one might have predicted. In times of uncertainty, investors flock to safety, a category that has tended to include the U.S. dollar. Sure enough, the dollar, which had been steadily climbing for a couple of years, strengthened even more. That made sense. The coronavirus had struck Asia and Europe. The U.S., the world’s largest, most resilient economy, had a good chance of being shielded by the extra time Americans had to prepare for the pandemic and prevent the coronavirus from creating a crisis of the magnitude faced at the time by Italy or Spain.”

Bloomberg – South Africa readying economic reboot plan, Ramaphosa says

“Talks between business, labor and government leaders to reach agreement on the recovery plan are going slowly, but are making progress, a person familiar with the negotiations said on Wednesday, asking not to be identified as the discussions aren’t public. Sticking points are reducing the number of focus areas and being more specific about timing, resources and commitments, they said.”

Kitco– Global equities tumble as Nasdaq, Brexit concerns mount; bonds rally

“While many market players were unable to pinpoint a single trigger for the Nasdaq’s plunge, valuations have been stretched given its 75% gain from a bottom hit in March with big bets on the option market possibly creating extra turbulence. “Whatever the reason … tech and growth investors have to decide whether this is a chance to buy on the dips – yet again – or a call to lock in what could be substantial profits,” said AJ Bell Investment Director Russ Mould.”

Business Live– Will we really have a vaccine by November?

“US President Donald Trump has never been one to let the truth get in the way of his personal ambition. So, faced with the very real risk of being a one-term president, it’s unsurprising that he’d try pin his political salvation on a coronavirus vaccine — or, at least, on the promise of one.”

 

What we think

 

Last week we wrote that “…16.55 could prove to be an important level to watch next week should it be tested. A move below that would likely lead to a test of 16.35 – 16.40. However, should the ZAR run out of steam, we’d expect to see 16.80 – 16.90”

Reading the above again, it’s clear we felt a need to hedge our bets somewhat in light of the current volatility and indeed this proved to be right – it’s just too difficult to determine clear direction at present and we remain in a consolidation phase, notwithstanding the big intra-day swings. Until we see more conclusive evidence of a break out of the current range, we’ll be sticking to our guns regarding our forecast trading levels, notwithstanding that we favour such a move to be weaker (above 16.90) rather than stronger (below 16.55).

Our range for the week ahead remains 16.55 – 16.90.

 

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Have a great weekend!