March 13, 2020
Market News 13 March 2020
What we know
We’ve been thinking about what we’d be able to write in this commentary for most of the week and despite there being more and more NEWS and CONTENT, we’ve ironically got less to actually SAY: this is a mess and as long as we’re in the midst of it, we simply have to roll with the punches.
From a financial markets’ perspective we’re experiencing a one in 10 to 20 year event, the type of brutal sell-off that has investors running for cover, central banks running to help, and the media running to tell us just how bad it all is. The fact that this financial meltdown is coupled with a very real threat to global health and economic trade (as opposed to the collapse of “smart” financial structuring seen in 2007/2008) means that the struggle is occurring on multiple fronts. As a result it’s been a week where most days have brought with them new records for daily market sell-offs.
And of course, this means risk-off: even if South Africa’s current fortunes and outlook were very healthy, we would not be immune (again, neither pun intended) to the effects of the global flight to safety. Over the past year or two the types of rate cuts we’ve seen from the Fed and BOE this week would have resulted in everyone highlighting SA’s relatively attractive real yields and justifying how this compensates investors for sending their capital into a land of corruption, malfunctioning infrastructure and ridiculous unemployment (we’re being a bit dramatic here, as we frequently question the logic of the carry-trade when such significant domestic risks abound). On this occasion the moves by the Fed, BOE and ECB have been worrying due to the fact that they have thus far failed to light a fire under markets, implying that investors are not convinced that these measures will necessarily have the desired impact.
Locally, apart from SA Business Confidence hitting a 21-year low, it’s been all eyes on local developments with regards to the coronavirus and everyone hopes our private and state-run health institutions are up to a potentially challenging few weeks and months ahead.
What others say
9 March 2020
BusinessMaverick – Stock markets tank as oil joins a toxic economic mix
“The oil price slide was a result of news that the Saudi Arabian government had thrown down the gauntlet after Russia refused to commit to production cuts of 1.5 million barrels a day last week. Instead, the Saudi Arabian government announced plans to flood an energy market that has seen oil prices already depressed by weak global demand.”
10 March 2020
Moneyweb – The changing winners and losers from oil’s historic plunge
“Perhaps the biggest worldwide change, though, is that inflation and interest rates are already at rock bottom. That means central banks may have very little capacity to cushion the deflationary effects of falling oil costs, according to Gabriel Sterne, head of global strategy services at Oxford Economics, a UK consultancy.”
11 March 2020
BusinessMaverick – Coronanomics 101: How to contain a contagion of fear
“The problem today, however, is a sudden stop in production, which monetary policy can do little to offset. Fed Chair Jerome Powell can’t reopen factories shuttered by quarantine, whatever US President Donald Trump may think. Likewise, monetary policy will not get shoppers back to the malls or travellers back onto planes, insofar as their concerns centre on safety, not cost.”
12 March 2020
Reuters – Fighting virus, ECB to run to Europe’s rescue
“With millions of people in lockdown, markets in turmoil and companies struggling with disrupted supply chains, the economy is already reeling, piling pressure on the ECB to roll out much of what it has left in its depleted policy arsenal.”
13 March 2020
Bloomberg – Fed Unveils Dramatic Measures to Ease Market Strain on Virus
“The New York Fed, which conducts market operations on behalf of the U.S. central bank, said in a statement that it is aiming trillions of dollars in temporary loans at the banking system in coming weeks to relieve strains as investors sell government bonds to raise cash. It will also purchase a broader range of government securities than just short-term Treasury bills to make sure the liquidity gets into the cracks appearing.”
What we think
Last week we wrote that “…short-term forecasts are fairly meaningless under current circumstances; however, the past week’s high and low become the most immediate points of guidance…our range for the week ahead is 15.21 – 15.86.”
As it turned out, that range was pretty optimistic: Asian trade in the early hours of Monday morning saw the ZAR.USD touch a high of 16.95. While a lack of market liquidity would have certainly exaggerated the move and it was quickly unwound, it certainly set the tone for the kind of week that lay ahead. Indeed, we only spent a few hours on Tuesday morning below the upper end of our range of 15.86 and from there it was a steady drift all the way back up to 16.60. This morning has seen a small bounce in global markets, partially due to the Fed pledging further supportive intervention, and the ZAR has accordingly moved slightly firmer to 16.20 at the time of writing.
At this moment in time it’s hard to provide high-conviction guidance to our clients and suggest doing the following, rather than focusing solely on the actual exchange rate:
1. Keep in mind the reason for your currency trades and what you’re trying to achieve
2. Decide how much value you place on the certainty of knowing the facts now over the uncertainty of what the future may bring
3. Consider hedging your bets by staggering your transfers rather than transferring the full amount under consideration in one tranche
4. Remember that any decisions taken at the moment are under conditions of immense uncertainty and extreme volatility
5. Keep washing your hands regularly
Our range for the week ahead is 15.90 – 16.60.
Have a great weekend, eat plenty of oranges and stay healthy!