July 13, 2021
Market News 13 July 2021
What we know
In a momentous week, the law finally caught up with former president Jacob Zuma for contempt of court. Zuma handed himself to the authorities on Wednesday night, and maybe not so surprising, the Rand barely blinked. By 9am on Thursday, the Rand had hardly budged, trading at 14.38 to the dollar. Some traders reminisced darkly on social media about how the Rand in the bad old days would have soared on the news. And perhaps it should have.
The arrest and imprisonment of a former president is not nothing. While an extended hard lockdown in South Africa would have provided some domestic excuse for ZAR weakness, the pro-Zuma protests and looting that ensued leading into the weekend in Kwazulu-Natal (KZN) and Johannesburg have since further decreased short term appetite for the Rand. Who would have thought we’d be having our own version of the USA’s January 6 Capitol insurrection? Two similarly unlikeable, possibly crooked despots, losing their grips on power and rallying their followers to make life as difficult as possible for the successors and fellow countrymen…
Many feel a sense of satisfaction at his (partial) comeuppance, but still does nothing to fix the mess he left in his wake. That’s been left up to his successor, although few are convinced that he has the ability to pull it off. But in the past couple weeks, there have been some important shifts. Individually, they might not appear particularly significant, but seen together they might very well be creating a base from which SA could begin its long road to recovery.
In the last month, Ramaphosa overruled his recalcitrant energy minister Gwede Mantashe and empowered large businesses to generate up to 100MW of their own energy needs. Taken together with the announcement that the private sector has been granted a majority stake in SAA, it suggests an underlying shift in government thinking about allowing the private sector to play a greater role in the key network sectors.
And it’s true that there has been a glacial but gratifying shift in the approach to corruption, as is clear from the charges levelled at suspended ANC secretary-general Ace Magashule and the fact that Zuma has been convicted of at least one serious offence so far. Elsewhere, Health Minister Zweli Mkhize is on special leave pending a report from the Special Investigating Unit which apparently fingers him for corruption in the R150m contract with Digital Vibes.
Should investors interpret this to mean that reform momentum is becoming unblocked, the shift in narrative could give hope that structural risks around SA’s long-term growth can be addressed. If the reform drive can gain momentum and spur confidence and investment, SA may just begin to pull out of its long terminal nosedive.
What others say
Bloomberg – Images of thugs burning the country are bad for South Africa – even worse for Zuma
This use of violence to achieve a purported political aim, the release of Zuma, may well be counterproductive. They create a situation in which the government, and President Cyril Ramaphosa, cannot be seen to be giving a pardon to someone simply because of the violence of their followers. And there are also important questions around whether this violence is sustainable in the longer term.
Bloomberg – Has the Fed boxed itself out of a smooth taper?
It’s not as simple as shutting off stimulus now. We may not be able to handle the truth of having to be weaned off QE forever, especially if the economy or stock market falters. A repeat of the 2013 taper tantrum is a risk the Federal Open Market Committee will have to weigh up very carefully, but not from a fear of sharply rising bond yields so much as the other moving parts of the economy.
Sunday Morning Herald – Does China know something the rest of the world doesn’t?
What’s unclear is whether the change is directed primarily at the banks or at the broader economy. Either way, while it’s too modest a change in monetary policy to signal fear, it does indicate concern. China’s economy is slowing as the rest of the world’s dramatic increase in consumption of its goods during the most intense period of the pandemic wanes, even as the authorities have resumed their attempt, frozen in 2020 as they responded to the pandemic, to deleverage an over-leveraged economy.
Daily Maverick – Here is what’s behind the surge in global agricultural commodity prices
The explanation for this phenomenon ranges from dryness in parts of South America in the past few months, which affected the crop that the region is currently harvesting, to other weather-related concerns in Europe and North America, where plantings for the new season of 2021/22 are at completion stages. But more fundamentally, the two critical issues adding upward pressure on global grains prices are the lower stocks and expectations of increased grain usage in the US renewable energy industry.
Economist – Could a four-day working week become the norm
According to one study of over 10,000 workers at an Asian technology company (the data were anonymised), total hours worked were 30% higher than before the pandemic, including an 18% increase in working outside normal hours. But this extra effort did not translate into more output.
What we think
Although emerging-market currencies are trading softer in general at the beginning of this week, we think a risk premium has been built into the Rand because of the unrest.
As political tensions and riots have seen numerous economic hubs coming to a standstill because of fear of looting, we expect the Rand to continue trading on the backfoot against the dollar. At the very least, until things quieten down somewhat, it is very hard to see the Rand being able to start clawing back its recent losses. From a foreign investor perspective, we feel that decisive (and potentially forceful) action by President Ramaphosa would be the most positive outcome, albeit politically fraught.
It is understandable that people are concerned about the consequences that recent South African events could have on the Rand. However, it’s important to remember that the global climate is just as fragile, and those global factors will be of equal significance in the short-term.
The rest of the economic calendar for the week is relatively light, and the highlights will be the US inflation and Chinese GDP numbers. However, with three central bank meetings scheduled for the next 5 trading days, there should be no lack of volatility – at least in FX.
Our range for the week is 14.40 – 14.70.
Have a great week!