June 12, 2020
Market News 12 June 2020
What we know
It was a really interesting week in terms of price action, not only with respect to the ZAR but with global markets in general. Having seen risk appetite remain elevated for the first half of the week, and the ZAR continue to rally, Wednesday night saw a rapid turnaround and all the previous few days’ gains erased within 24 hours. Strangely, just prior to Fed Chairman Powell starting his address (the catalyst for the sell-off) the USD weakened significantly, causing the ZAR to move from 16.52 to 16.32 in a matter of minutes.
USD & the Fed in focus
We’re not going to go into the detail regarding precisely what Jerome Powell said on Wednesday and refer you to the article “Dovish Powell Sees Fed Keeping Foot on Gas Until Jobs Come Back ” below; however, some key points were:
- The US economy will take a long time to recover from the impact of the coronavirus
- The recovery in the unemployment rate will be slow, notwithstanding last week’s better than expect jobless numbers, and some jobs that have been lost won’t necessarily reappear again
- The Fed will continue to remain very supportive of the economy and markets, meaning that interest rates will remain low for longer than many people may have thought
The above points were sufficient to give the market a big fright and to cause investors and traders to take some risk off the table, which in turn saw a rally in the USD and gold, while recent winners such as Oil, equity markets and the ZAR took a big hit.
All we can ask, as we have been doing for some time, is: did everyone think things had suddenly become hunky-dory over the past few weeks? Was everything back on track, the virus beaten and economies thriving? While no one would have answered yes to the above, the point is that the market has been running ahead of itself in terms of increased risk appetite and the extent to which the worst may be over.
We’re not making this point to prove that we have been right – indeed, we’ve had the same view since the Rand was at 17.80 – 18.00 against the USD and, if anything, the ZAR would need to give up another 5% for us to consider our own recent bearishness to not have been wrong!
Rather, we simply need to highlight the fact that when things are starting to be “priced for perfection” one should always remain cautious and prepared to protect oneself against a blow-out. To repeat Mark Brijder’s words from last week: “The door seems very narrow when all positioned the same way. Economies are getting back to work but they will be fundamentally weak. Strategy for now is join the herd at the back at the back of the queue and be ready to run.”
First sign of pressure on ZAR
And it had all been going so well…
Having rallied from 16.80 to 16.50 in the early part of the week, Wednesday night’s fireworks were intense. At the extremes, from high to low the Rand gave up 96c in just over 30 hours, from 16.32 to 17.28. While things have since settled down, the loss of 50c from the more “normalised” level of 16.50, means that at the time of writing the ZAR.USD is trading at just below 17.00. Again, it’s important for clients to note that this is not about the Rand: it’s about the USD which has bounced off its lows, while risk aversion picks up. Importantly, even with this sell-off we have still given up less than 2% on the week, hardly a significant amount in the context of the recent rally.
The strength in the ZAR (or weakness in the USD) since late May, when we broke through the lower purple line of the consolidation channel, has been relentless. Typically one would expect some kind of pull-back, even in the midst of a bullish run; however, there was little sign of this, other than the brief sell-off at the end of May.
As a result, at the first sign of “trouble” on Wednesday night, the reaction was very strong indeed. Whether or not this is simply a correction within the improving trend or the start of more sustained weakness remains to be seen; however, we continue to be cautious in the current environment and suspect that further weakness may follow.
What others say
Investopedia – Greenspan Put
“Greenspan put was a term coined in the 1990s. It referred to a reliance on a stock market put option strategy that if utilized could help investors mitigate losses and potentially profit from deflating market bubbles. The strategy itself was not a specific investing or trading methodology, but rather a generalized notion that stocks were so volatile that an investor would do well to buy a put option while holding on to those stocks.”
9 June 2020
Zero Hedge – It’s millennials vs boomers: A look at the retail investors shaping the market
“Over the past few months, a lot of attention has fallen on retail investors who at times appear to have taken over the market, as institutional investors have been slow in jumping in on the “hated” rebound from the March 23 lows, with many commentators lumping all retail investors in the same bucket.”
10 June 2020
Bloomberg – ‘Dovish Powell sees Fed keeping foot on gas until jobs come back
“Federal Reserve Chairman Jerome Powell sent a powerful message Wednesday that the central bank will keep pumping stimulus into the U.S. economy until its traumatized labor market has healed from the harm of the coronavirus pandemic.”
11 June 2020
MoneyWeb – Tito’s emergency budget and the harsh realities awaiting SA
“Finance Minister Tito Mboweni will be delivering an ’emergency budget’ later this month (June 24, but maybe this will change) – something that didn’t even happen during the 2008 financial crisis. The impact of the three-month Covid-19 choke on economic activity will be spelt out.”
12 June 2020
Bloomberg – Junk rating forgotten, investors pile back into South Africa
“The country is now paying less to borrow in the local-currency than at any time in the five years before Moody’s Investors Service removed its last investment-level rating on March 27. The rand has rebounded, risk premia have returned to pre-downgrade levels, and foreign investors are streaming back into the country’s bond market after a record selloff in the first five months of the year.”
What we think
Last week we wrote that “We continue to take the stance the Rand should not, in the context of what we currently know and with all things being equal, be trading in the low 17.00’s, let alone the 16.00’s… It’s never particularly nice to be wrong in regards to one’s view and opinions; however, this won’t stop us from continuing to question the extent of the current rally, even in the face of such strong momentum, and we still expect a return to the 17.80 level in the coming weeks.”
There’s little more to add that hasn’t already been said in this commentary. Rather, we refer you again to the chart in the previous section and in in particular the three horizontal green lines. The first range is 16.80 – 17.25/17.30 which coincides with the forecast we had for this week – this continues to be our range for the week ahead. Beyond this, we favour a return to 17.80, notwithstanding the first target in the face of further weakness would be 17.40.
Have a great weekend!