Market News 21 February 2020

What we know

 

It’s a relatively short comment this week as a lack of news-flow meant we continued with the current directionless trading pattern.

Having opened at 14.89 on Monday and moved down to 14.84, hopes of further gains were quickly snuffed out by the Moody’s headlines regarding their outlook for SA. While there was nothing new or unexpected in the comments, it’s understandable that the market reacted cautiously, moving from 14.92 to 15.02 in response. The agency continues to be poker-faced with regards to a possible downgrade and market commentators remain split as to what the outcome will be. However, one could ask whether this statement was released as a subtle hint that a downgrade may indeed be on its way.

Despite this domestic focus, the ZAR’s performance this week – down 1.6% at the time of writing – was reasonably in line with other emerging markets, suggesting that the real driver is in fact global risk aversion which remains elevated. This is seen in the USD trading at its highest levels since May 2017, while gold last traded above $1,630 in 2013.

The reason for this caution is of course COVID-19, and Apple’s announcement that the virus is causing production delays followed similar comments from Walmart. Despite this, equity markets continue to hold up reasonably well, partly due to policy-makers in Asia easing monetary policy and governments preparing spending programmes to reduce the economic impact. One would imagine this can only help for so long and the longer the spread continues, the higher the risk of a future sell-off becomes.

What others say

 

17 February 2020

Daily Maverick – Old promises turned into new promises – with implementation detail financing left to Mboweni’s Budget

“The governing ANC has been talking state bank since at least 2010 when talk at the Durban General National Council (NGC) proposed linking government service delivery with postal infrastructure to a Postbank, aka State Bank.”

18 February 2020

MoneyWeb – Rand ticks lower as Moody’s stokes downgrade fears

“If the budget speech fails to offer the detail and insight Moody’s seek, South Africa could lose its last investment-grade credit rating – something that may send the rand tumbling.”

19 February 2020

Reuters – Fed policymakers cautiously optimistic on U.S. economy despite new risks, minutes show

“The readout on Wednesday of the policy discussion, at which policymakers unanimously voted to keep interest rates unchanged in a target range of between 1.50% and 1.75%, also showed Fed officials were skeptical about any big rethink of the central bank’s inflation target.”

20 February 2020

Bloomberg – Investor Anxiety Rises as Coronavirus Spreads Outside of China

“While China reported a sharp decline in new infections, the country’s shifting reporting guidelines have raised doubts about the reliability of data from the center of the outbreak. South Korea reported its first death from the virus Thursday while cases surged to 104, and infections in Japan shot up in the past week. In Singapore, more than 80 people have contracted the virus.”

21 February 2020

MoneyWeb – The world’s biggest economies get a jolt of government spending

“Asian economies like China and South Korea are using fiscal policy to counter the menace of the coronavirus, which has shut down swaths of industry and devastated supply chains, while governments in the UK and Russia have ditched long-held commitments to austerity.”

What we think

 

Last week we wrote 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…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.”

After last week’s SONA came and went with little enthusiasm, the main attraction is now only a week away. We think the budget speech and Moody’s decision will come as a relief to many as, irrespective of the outcome, the current uncertainty is a source of angst for all sectors of society and serves to inhibit the ability for decisive and productive decision-making by many participants. “Rip off the band-aid” and let’s get on with it.

It’s been a frustrating few weeks for us in our engagement with clients as our level of conviction has been limited, outside of the fact that the current range of 14.70 – 15.10 has remained in place and as long as that is the case, any decisions need to be taken within the context of one’s specific personal or business requirements.

The price action this week now suggests that bearish positioning (opportunities to sell the ZAR into strength) will be favoured at least until Tito has spoken next Wednesday, making it likely that support will come into play at 15.00.

Our range for the week ahead is 15.00 – 15.50.

 

---

Have a great weekend!