March 15, 2021
Market News 15 March 2021
What we know
In the absence of any desirable local news, the Rand savoured another resilient trading week as risk assets all round encountered renewed support in the wake of the US stimulus package being signed into law. As you read this newsletter, cheques are landing in bank accounts as part of the $1.9 trillion pandemic-relief bill President Joe Biden signed into law last Thursday. This in addition to a broad recovery in risk trends as sentiment improved on the heels of simmering bond market volatility.
The expression “the tail that wags the dog” is deployed to describe a situation when one small factor becomes the dominant differentiator in outcomes. Although bond yields are but one aspect of global financial markets, they are in the driver’s seat. Yields are wagging the dog; commodities, FX, stocks, and seemingly everything in between are responding directly to movements in US Treasury yields.
Even to us, it’s still not very clear how sustainable yields are as a driver of US Dollar strength in the short-term, in part because the Federal Reserve (Fed) insists it won’t lift interest rates until it has seen above-target inflation materialise and is confident that its 2% average target is attainable over the expanse of time.
Back home, amid warnings that SA could miss its 40 million vaccination target due to a lack of adequate stock, Eskom announced on Sunday that it has extended load-shedding to Wednesday due to constrained generation capacity. When South Africans discuss their problems, two words dominate the discussion: lockdown and load shedding.
Economists disagree on most issues, but there’s one thing they all agree on: without a solution to load shedding, no economic strategy is going to work, no matter how fiscally conservative or ambitious. Investors and ratings agencies also agree, as do our politicians, that as long as load shedding persists, a post-Covid-19 recovery is a pipe dream. That said, the fourth quarter GDP print of 6.3% q/q saa supported our view that the economic recovery would continue, albeit at a slower pace than in the third quarter.
What others say
Financial Times – Popularity of US stimulus puts Republicans in a bind
“Bennett added that history showed the public often rallies behind the president’s party in times of crisis, from Franklin Roosevelt in the Great Depression to George W Bush in the immediate aftermath of 9/11 — something that could bode well for Democrats in next year’s midterms, when Republicans will try to take back control of both the House and the Senate.”
Tech Central – Which is the best Covid vaccine to get? It’s complicated
“All the authorised Covid vaccines so far require two doses except for J&J’s and CanSino’s, which are single shot — a big plus. A one-dose vaccine reduces the burden on the health-care system, which is substantial in a mass-vaccination campaign. It eliminates the challenge of getting people to return on time for a second dose; a US study found one in four senior citizens failed to do so after getting an initial injection of the shingles vaccine.”
Bloomberg – Emerging markets brace for rate hikes with debt at records
“Rate increases are an issue for emerging markets because of a surge in pandemic-related borrowing. Total outstanding debt across the developing world rose to 250% of the countries’ combined gross domestic product last year as governments, companies and households globally raised $24 trillion to offset the fallout from the pandemic. The biggest increases were in China, Turkey, South Korea and the United Arab Emirates.”
Daily Maverick – Spotted: Signs of things moving Ramaphosa’s way
“It is not a coincidence that former president Jacob Zuma and EFF leader Julius Malema have of late cast frantic evidence-free aspersions against judges. But now the Judicial Conduct Committee (JCC) of the Judicial Service Commission (JSC) is beginning to do its work relating to judges accused of misconduct.”
What we think
Last week we stated that “…rather than South Africa specific factors being behind the ZAR’s moves, it has been global sentiment and the resulting risk appetite…”
With a monetary policy decision and a credit-rating review on the immediate horizon, not to mention market havoc caused by the rise in bond yields, we can’t see a break ahead for South Africa’s rand. The good news for the rand is that commodity prices are hovering near an eight-year high. The bad news is that raw materials matter less for South Africa’s currency than movements in US Treasury yields at the moment.
With this in mind, our outlook for the Rand hinges on how the USD fairs in the near-term. The difficult question of course is whether the current rally, which is underway will also fail or continue, given the increased likelihood of US yields staying higher and potential rising further. We have maintained a neutral range of 15.00 – 15.50 for the past few months, and this remains the case. The implication is that we are now close, for the first time in many months, in seeing the Rand trade a bit weaker than what we feel it should.
In a week in which the clocks go forward in North America, FX markets will be focusing on the FOMC meeting on Wednesday. We expect the FOMC to work to reign in market policy rate expectations. Although recent communications suggest that participants are comfortable with some steepening of the yield curve in light of improved growth fundamentals, the committee will be eager not to ratify expectations of an earlier lift-off, which seem premature. For now, we think the committee will be content to employ communications to influence expectations, keeping its heavier artillery (such as lengthening the duration of monthly Treasury purchases, a “twist” operation, or even yield curve control) in reserve, for now.
Our range for the week ahead remains 15.00 – 15.50.
Have a great week!