February 22, 2021
Market News 22 February 2021
What we know
As we were celebrating Valentine’s Day last weekend, there was another anniversary you might have missed. The Rand celebrated its 60th birthday as it held fast as the weathervane of emerging-market confidence. While South Africa is one of the worst-performing economies in the emerging-market space from a macro standpoint, the market seems to like the Rand. Either the hunt for yield is a blinding factor, or the Rand is set for some sharp repricing.
USD the driver
The first fallout from rising US Treasury yields emerged this past week, with a stronger dollar buffeting emerging-market currencies such as South Africa’s Rand and the Brazilian Real. The Rand has slumped about 2% since US ten-year yields crossed the 1.3% mark on Wednesday, touching the highest since the market chaos of March. The surge in the key global benchmark yield is raising the prospect of a pause in the dollar’s recent slide, which could undermine the rally in risk assets. Developing economies like South Africa that are reliant on external financing may find their currencies especially vulnerable to any sustained strength in the greenback.
The medium-term question is: is this the start of a more sustained dollar rally than those we have seen of late? The market has certainly bought fully into the weak dollar story for a while now, and any attempts at a recovery by the USD index have been fairly limp. There’s now a question around how much higher Treasury yields may climb, with some arguing that it could edge up a bit more, while others see it advancing to 2%. The message is that investors still see additional fiscal stimulus as a lock and are banking on the vaccine rollout gaining momentum. It is by no means an easy call to make; however, it’s clear that the fate of the USD will be a major driver of the ZAR’s fortune over the course of 2021 – any significant USD rally will quickly send the Rand back up to the 15.50 level.
Budget in focus
This week, however, investor focus will on Wednesday fall squarely on the domestic element of the Rand’s fundamental story, when Finance Minister Tito Mboweni delivers the national budget, where the country’s poor business climate and the government’s sluggish commitment to reform – once again – comes under scrutiny. The Finance Minister will have to show that government is serious about tackling corruption. He will have to show it’s as serious about cutting expenditure. Essentially, he has to submit the country to a bout of debt-counselling where the country’s credit cards are cut up and we learn to live within our means.
And he’s going to have to make it clear that he appreciates profitable companies that create the jobs for people who pay their taxes, and he’s going to have to suck up to that constituency especially hard.
Already the country’s gross loan debt is expected to amount to R4.83 trillion, or 86 per cent of GDP. Consequently, the government is spending in the region of R263 billion a year in interest alone, money that could be better applied to Eskom, water security, education… Take your pick, there are plenty of places the money is needed.
What others say
Business Insider – Here’s how your taxes could change after next week’s Budget 2021
“The possibility of increasing the withholding tax rate on dividends from the current 20% exists but it is more likely that the withholding tax on interest will be increased from the current 15% to 20%, especially given the perceived loss of tax revenue attributable to highly leveraged operations and previous announcements in this regard.”
Financial Times – Bond trading finally dragged into the digital age
“In practice, it remains tricky to untangle what is truly a purely “electronic” bond trade from one that is logged digitally but still arranged, primarily, in a more traditional way by traders gabbing on the phone or on their Bloomberg terminals. Yet the volume data from the two dominant electronic fixed income trading platforms underscore how rapidly things are changing.”
Business Live – Truant Jacob Zuma tells ANC the law is too soft and lacks bite
“Speaking during the virtual gathering on Sunday, Zuma said the country’s laws take a “soft” stance, even against those who commit heinous crimes. “For an example, today, if I commit a crime, if I kill somebody in front of all of you, the laws of this country say you can’t say this person is being arrested or charged because he’s killed a person, it says we must say we suspect this man has killed this person. That’s the softness of the law.”
New York Times – China censors the internet. So why doesn’t Russia?
“More broadly, the question of how to deal with the internet lays bare a dilemma for Mr. Putin’s Russia: whether to raise state repression to new heights and risk a public backlash or continue trying to manage public discontent by maintaining some semblance of an open society.”
What we think
Last week we noted that there was cause to “…be weary of a move back to towards 14.80 – 15.00 following next week’s budget. While sentiment towards what we may hear in the budget has improved over the past few weeks, we still find it hard to see significant enough improvements to warrant trading so strongly.”
We head into this crucial week with the view that the ZAR is potentially more exposed to profit taking ahead of the budget presentation. Some of this profit taking might already be on display: the GBPZAR for example has risen 4% back to20.80 at the time of writing, following days of declines that saw the pair fall back towards the key 20.00 area.
How the Rand negotiates coming days will reflect how the contradictory forces of a supportive global backdrop and the unsupportive domestic scene resolve. Apart from capital outflows, weak economic fundamentals become a major burden for the Rand, which cause substantial losses, often to excessive levels. As long as the Rand remains one of the most liquid emerging-market currencies and the Reserve Bank refrains from intervening and allows it to trade freely, the vicious cycle of spectacular rallies followed by substantial corrections is likely to continue.
Our range for the week ahead is 14.70 – 15.10.
Have a great week!