January 17, 2020
Market News 17 January 2020
What we know
It was a notably calm week for the ZAR this past week, as lack of significant news-flow saw the bulk of trade take place in the 14.35 – 14.50 range. While we managed to rally off the touch of 14.50, we suspect that the level may be tested again in the days ahead.
Globally the main features were a cooling off in the Middle East tensions, certainly as far as the military sabre-rattling is concerned. The Iran Nuclear deal remained very much in the news however, with France, Germany and the UK invoking the agreement’s dispute mechanism. While largely a technicality for now – all three countries stated that they would like to be able to reach agreement – the deal is clearly under severe pressure. We’ve certainly not heard the last of this and the deal, sanctions and possible military manoeuvres in the gulf will feature prominently in the news this year.
Phase one of the US-China trade deal was signed on Wednesday and while obviously a positive step in the right direction, it’s clear that there is much more to be done and dealing with the more sensitive areas of the trade war will become increasingly challenging as progress is made. While we should at least now see stability in the US-China trade relations until after November’s US election, we also don’t expect any further progress after Trump said as much. Indeed, may we see this issue being (ab)used to gain political leverage during the upcoming campaign?
Locally, the star performers were the 5 MPC members who unanimously decided to cut local borrowing rates by 25bps yesterday. We were of the opinion that a cut was in order at the last meeting and as such were glad to see it happen yesterday, despite most commentators suggesting there would be no change. While the cut won’t change things overnight, any kind of relief is most welcome and a step in the right direction. Given how unexpected the decision was, we are somewhat surprised that, aside from an initial move weaker, the ZAR didn’t actually weaken further, given that any rate cuts reduce the ZAR yield which has attracted investors recently.
The main economic releases this week saw the UK continuing struggle, with poor GDP and retail sales numbers hurting the GBP. Local retail sales figures were actually better than expected, while mining production was softer. Today saw Chinese GDP for Q4 of 2019 come out at 6.1%, the slowest growth in 30 years but better than expectations – given the skittishness about the impact of the trade wars, this was a pleasant surprise for global markets.
What others say
13 January 2020
MoneyWeb – Elections are about to inject some volatility into emerging markets
“It’s not just the US presidential election that will dominate the political calendar in 2020. A slew of emerging markets face their own votes as investors embrace politics-inspired turbulence.”
14 January 2020
Reuters – Drag from Trump’s trade wars continues to ripple through U.S. economy
“Research from the U.S. Federal Reserve and other top economists shows that U.S. tariffs on Chinese industrial components and materials, which largely won’t be lifted by the deal, are proving especially damaging to American manufacturing competitiveness and jobs.”
15 January 2020
MoneyWeb – What African central bankers will discuss in the next two weeks
“South Africa has multiple reasons to cut. Real interest rates are at the highest level in almost a decade, inflation has been at or below the mid-point of the target range for a year, break-even rates measuring price-growth expectations are near a record low and the economy may have slumped into a second recession in as many years after it contracted in the third quarter of 2019.”
16 January 2020
Business Maverick – SARB surprises with a rate cut to kick off 2020 and slashes growth forecasts
“Inflation, and the expectations around it, was a key reason for the cut. It has continued to surprise on the downside, even though it is a trend one would generally expect when the economy is so weak and unemployment is so high. If inflation does take off against this backdrop, then South Africa will be stuck in the terrible rut of stagflation. But inflation shows no signs of taking off anytime soon, barring a dramatic oil price shock, or a plunge in the rand’s value.”
17 January 2020
Bloomberg – China’s Economy Grew 6% in Fourth Quarter, Investment Picks Up
“The world’s second-largest economy expanded by 6.1% in 2019, slower than 6.6% the previous year but in line with the government’s target. The signing of the phase-one trade deal with the U.S. this week combined with recovering global demand has improved the outlook for Chinese factories and exporters in 2020, though uncertain implementation of that deal and domestic financial fragility remain risks.”
What we think
Last week we wrote that “we still favour a return to our forecast range and, in our opinion, only avoiding a downgrade should be sufficient reason not to reach 15.20 in the coming months. We have been wrong in the sense that we have traded below the 14.70 bottom end of our range for the past 4 weeks; this only strengthens our conviction that current levels present an attractive opportunity for those looking to externalise funds.”
Whenever one has made a “wrong” call it’s important to recheck oneself to make sure that continuing to support that view is not due to inherent bias, anchoring or any other kind of behavioural finance mistakes. We continually attempt to revisit our outlook with fresh eyes and to debate this amongst ourselves.
Having done so, we again suggest that there are simply too many domestic concerns on the horizon,which we cut-and-paste from last week: the economic challenges of the past few years have followed us firmly into 2020; Eskom gave holiday-makers a brief respite before resuming load-shedding earlier this week; while February’s budget speech is only 6 weeks away with the spectre of a probably Moody’s downgrade looming just behind.
As such we conclude that we struggle to see a case for the Rand maintaining current levels, let alone strengthening from here.
Our range for the week ahead is 14.30 – 14.60.
Have a great weekend!