April 17, 2020
Market News 17 April 2020
What we know
Day 22 of the lockdown and another two weeks to go…
Whether the lockdown will be lifted come end of April will depend on a host of factors, with the primary metric being the average rate of new infections in the country. Should new infections rise, we could see another extension, and should they remain constant or decrease, we could see the beginning of the easing of some of these restrictions (bearing in mind the powers that be have indicated that coming off from lockdown will be a slow and lengthy process, reintroducing society in a safe and structured manner).
We started the week with a surprise announcement by the SARB to cut the interest rate by another 100 basis points. This took the repo to 4.25% from 5.25%, reducing the prime lending rate to 7.75%. The last time the repo rate was this low was in 1973. The SARB now expects the economy to contract by 6.1% in 2020, compared to a decline of 0.2% expected just three weeks ago.
Following the interest rate cut, the Rand sold off more than 1% against the USD. The Rand was trading around 18.00 to the dollar at the opening on Tuesday and was back up towards highs of 18.81, 23.50 and 20.48 against the USD, GBP and EUR respectively on Wednesday – the main catalyst being renewed fears around the economic impact of the COVID-19 pandemic. This led to a fresh demand for safe-haven assets and a rotation out of Emerging Market currencies on the day.
Moody’s also revised growth forecasts for South Africa and are now predicting that our economy will contract by 2.5% this year. They added that a return to investment grade is ‘unlikely in the near future’ and that outlook remains negative. It should be noted that prior to the ratings agency downgrade (and before the country entered a lockdown period), Moody’s had forecast growth of 0.4%.
On the data front, Chinese GDP data suggests the first contraction in decades, missing expectations (-6.8% vs -6% expected) year-on-year in the first quarter of 2020. The western world parties haven’t fared any better, with economic data out of the US also disappointing (as can be expected), which continues to keep markets on edge.
We are also starting to see signs of the infection curve flattening and the epidemic in Italy and Spain brought (more) under control. Then, just yesterday, Gilead Sciences announced that their coronavirus drug (Remdesivir) suggests patients are responding to treatment in the clinical trials – positive results will likely lead to fast approvals by the Food and Drug Administration and other regulatory agencies.
Follow this link to read the full article: Early peek at data on Gilead coronavirus drug suggests patients are responding to treatment
What others say
13 April 2020
Business Maverick – The good and the bad of a post-coronavirus global economic order
“With some flattening of the coronavirus curve becoming evident in countries that have either better contained the spread of the virus, like New Zealand, and others that have been ravaged over the past month, like Italy, economic minds are already looking forward to what the world economic order could look like after the pandemic has been contained. It seems we can expect a mixed bag of good and, if left unchecked, bad structural changes.”
14 April 2020
MoneyWeb – A rally in need of help
“While we expect a recovery of flows to emerging markets in the second half of 2020, we do not believe that the pickup will be strong enough to bring about a return to 2019 levels,” economists at the Washington-based Institute of International Finance, including Robin Brooks and Elina Ribakova, wrote in a note. “We expect many countries to turn to multilateral support in coming months due to external financing stress and a lack of policy space to support their economies.”
15 April 2020
Reuters – Moody’s sees South Africa GDP shrinking 2.5% as coronavirus shutdown weighs
“On Tuesday the South African Reserve Bank said it saw gross domestic product (GDP) shrinking 6.1% this year, while major banks locally and abroad see the likelihood of an even deeper recession, especially if the shutdown is extended beyond May 2.”
16 April 2020
Business Maverick – Why South Africa needs a stimulus plan
“In the long term, the local bond market should be the primary financier of the South African government. One of the best protections South Africa has is a very long-term debt profile that is primarily denominated in rand. This combination provides a great deal of protection in a crisis. The government needs to ensure that it is able to borrow in the local bond market at affordable interest rates.”
17 April 2020
MoneyWeb – Africa may see millions of coronavirus cases, tentative WHO forecast shows
“Trump accused the Geneva-based WHO on Tuesday of promoting Chinese “disinformation” about the new coronavirus, saying this had probably worsened the outbreak and that he would stop its funding even as he defended his own handling of the crisis.”
What we think
Last week we wrote that “In the near-term, an absence of bad news may allow for a test of 17.80, whereafter the next target becomes 17.30. Should things deteriorate, however, we would expect support in the 18.30 – 18.50 range.”
The Rand is the worst performing Emerging Market currency this week, following the additional 1% interest rate cut on Tuesday, and we expect pressure to continue. As has been the theme over the last few years, the carry trade (yield play) was most popular with the Rand, but the attractiveness has quickly dissipated with the 2% (total) cut in recent weeks.
We reiterate that barring the above, direction will largely come down to how the virus plays out over the coming weeks, and assessments of rates should be made regularly.
Our range for the week ahead is 18.30 – 19.00.
Have a great weekend and stay healthy!