Market News 14 February 2020

What we know

 

So we end a fairly interesting week 1.4% stronger than where closed last Friday – outperforming our emerging market peers. It is however important to note that there is simply no direction to ZAR trading at present. As things stand we are simply range-bound between 14.70 – 15.10. Picture the surf at Muizenburg during a howling South-Easter and that’s what the market feels like at the moment…just a noisy mess!

The rather boringly named COVID-19 continued to cause concern around the globe, with many first- and second-hand anecdotal accounts now becoming commonplace for many, rather than relying solely on news and social media channels. One of our colleagues has a cousin stuck on the quarantined Japanese cruise-ship which has effectively become a waterborne prison, while another article mentioned a Saffer who has found himself being the sole person pitching up for work at his office in Singapore. Similarly, shops find themselves with no food in stock at the end of a weekend, as people are buying supplies for the entire week ahead. While markets have settled down – the Hang Seng Index has recovered close to the levels seen prior to the outbreak. We continue to wait and see what the human and economic cost will be.

The US Democrat primaries meanwhile provided some very surprising results, in particular the very poor showing from Joe Biden. The cynics may ask whether Trump’s alleged Ukrainian smear campaign worked or whether he needn’t have actually bothered! The bottom line is that Bernie Sanders has become the front-runner to be the Democrat nominee. Now while Trump may be (very) unpalatable to many people, it’s also highly unlikely that centrist democrat or republican voters are willing to put their voices behind what many consider to be a socialist candidate – four more years of the MAGA administration is likely more appealing than the USA becoming the USSA (United States of Socialist America). Likely reflecting this sentiment is the fact that Michael Bloomberg, a far more moderate Democrat than Sanders, has moved from rank outsider to breathing down Sanders neck in recent days. Despite having said otherwise, this development will be worrying to Trump, while still being relatively market friendly.

And finally, SONA. While the real entertainment came from the EFF’s shenanigans and delays, President Ramaphosa did what he could: outline a few grand and not-so-grand visions and plans, without providing any real substance. It is therefore unsurprising that focus has quickly shifted to Tito’s budget on 26 February. The main takeaways from the speech, as outlined by Fin24, are as follows:

1. Emergency power procurement
2. Municipalities will be allowed to buy power from independent producers
3. SA will have a state bank & a sovereign wealth fund
4. A new plan to fight youth unemployment
5. SAA must be independently sustainable
6. Commercialisation of hemp
7. Spectrum licensing before end of 2020
8. More Investment Conferences
9. Debt heading towards ‘unsustainable’ levels

Click here for the full article: Key economic takeaways from Ramaphosa’s State of the Nation Address

Local economic data continued to disappoint, with each of manufacturing production, retail sales and unemployment reminding us (as if we needed it) of how tough the current environment is for individuals and corporates.

 

What others say

 

10 February 2020

MoneyWeb – Asian markets stem losses as China returns to work but sentiment jittery

“To contain the spread, China’s government had ordered lockdowns, cancelled flights and shut schools in many cities. But on Monday, workers began trickling back to offices and factories though a large number of workplaces remain closed and many white-collar workers will continue to work from home.”

11 February 2020

Reuters – Sterling close to 2020 lows as Brexit uncertainty lingers, 4Q GDP data on radar

“Preliminary data for the fourth-quarter gross domestic product was due at 0930 GMT, but analysts say the data was unlikely to shine light on whether the BoE was ready to inject more stimulus into the economy as at the last meeting officials signalled they are more interested in seeing if growth picks up after the December election.”

12 February 2020

Business Maverick – South Africa’s State of Unemployment Disaster

“South Africa’s unemployment rate remains 29% – five times the rate for the rest of the world. To most South Africans, even this distressingly high rate does not capture the full extent of joblessness. The headline figure, also known as “strict” or “narrow” unemployment, considers just the seven million people who have actively sought work in the last four weeks.”

13 February 2020

Bloomberg – South African Airways May Sell Heathrow Slots to Raise Cash

“The airline was placed under a local form of bankruptcy protection by South African President Cyril Ramaphosa after last making a profit in 2011 and having received 57 billion rand ($3.9 billion) in bailouts since 1994. The administrators have announced that they will cut eight international routes and end all domestic flights aside from those between Cape Town and Johannesburg, drawing criticism from labor groups and government.”

14 February 2020

MoneyWeb – ‘This year, we fix the fundamentals’ – Ramaphosa

“He also basically opened up the electricity market, where municipalities in good standing will be free to buy electricity from an entity other than Eskom. This means Johannesburg’s City Power is now free to self-provide or source power from whoever it wants to.”

What we think

 

Last week we wrote that “it does appear as though the 14.70 level has now turned into a support level preventing further ZAR strength beyond that..and it’s hard not to be fairly bearish at present.”

We mentioned at the start that there is no clear ZAR trend at present, and current probabilities favour a weakening currency, especially with the major risk events of the budget speech and Moody’s review now being very front-of-mind. The question that everyone is therefore asking is how much bad news is priced in: in other words, if the budget is as bad as expected and we are downgraded to junk, just how much would the Rand weaken? We’ve heard everything from 18 to the USD being a possibility to a view suggesting that there is little further weakness in store (the latter, in theory, is plausible given that markets are forward looking. Our view is that the worst case outlook would see the ZAR trade up to 15.50 – 16.00, while a “predictable” budget and no downgrade would see us back to 14.30. Only time will tell.

Our range for the week ahead is (a fairly boring) 14.70 – 15.10.

 

---

Have a great weekend!