Market News 24 April 2020

What we know

 

And so it continues, life under lockdown with all the unique challenges and adaptations that everyone has been forced to undertake. While everybody will likely be feeling frustrated and possibly overwhelmed at times, one also gets the sense that those with the means to be able to work from home, maintain a steady income and live a restricted yet comfortable life, understand just how fortunate they are and grateful they should be.

Indeed, after “only” 4 weeks of lockdown, Government’s efforts to protect the physical health of the country have been met by intense pleading to not further harm its economic well-being. As such this was an enormous week in the context of how President Ramaphosa’s handling of the crisis will be viewed in the future.

Economic Relief

Tuesday saw the announcement an economic stimulus plan of R500 billion (around 10% of South Africa’s GDP). The plan has been welcomed and will offer much-needed relief to poor households and those who have lost their jobs, as well as businesses in financial distress. The R500 billion will be partly financed by South Africa – R130 billion from the existing budget and the balance from the IMF, World Bank and other development finance institutions.

As is always the case, not everyone will be happy with the extent or distribution of the aid and you can read more on this in Wednesday’s article in the section below. Our view is that government has done what they can in a very difficult situation and with relatively limited funding options. The damage done by Crooked Zuma and his cronies is absolutely glaring at this time of crisis. While no one really knows how much he stole (including him, given how we’ve seen him struggle to read large numbers), estimates of between R 500 – R 1,500 billion is probably a wide enough range to include the actual figure. In other words, even a conservative figure of what was stolen would have given Treasury enough to cover this unexpected expenditure (while the higher range could sort out Eskom, other SOE’s and leave some change). The bottom line is that we now have an additional economic and fiscal burden to bear, and we suspect that the R 500 billion is probably not the last of what will be required.

Easing of Lock-down

Last night Ramaphosa announced a five level “risk-adjusted strategy” where the country will slowly ease lockdown restrictions starting on the 1st of May with level 4. This means that some activity will be allowed to resume but with precautions. Our country’s response to the coronavirus has kept the number of infections in check and while it is unlikely that we will avoid a surge in cases, scientists advising the government believe that they have bought valuable time that will allow hospitals to get prepared.

We suspect that the pushback against an almost total lock-down of the economy had grown to such an extent over the past week or two and came from such a wide array of stake-holders, that the President’s hand was forced into at least showing some sign of a relaxation of the current restrictions. That’s why the move to level 4 seems like a very sensible, patient move and we can only hope that expectations are realistic with regards to just how slow the moves to the lower levels may need to be. While different countries each have unique circumstance, it is worth noting that just yesterday Angela Merkel was saying that Germany (who have dealt with this as well as anyone else) is “still at the beginning” and “(is) not living through the final phase of this crisis”. Even as they ease their own restrictions she noted that “this interim result is fragile. We are on thin ice, one could even say on thinnest ice”.

(We also suspect many who were watching last night’s announcement had more specific agendas and those who like a cigarette would have come away much happier than exercise fanatics and those who like a nice tipple or two!)

Market Action

In terms of market news this week, we again saw unheard of and extreme market reactions to the fall-out. On Tuesday there was much fuss made about how the price of a barrel of benchmark US oil had fallen below $0 for the first time in history. Although a negative price may seem impossible to the layman, it is a fascinating case study and we have included an article about it below. The bottom line though is that it shows just how extreme the drop in demand for oil (an important measure of economic activity) has fallen over the past few months.

One thing we’re debating is how come when oil was above $100 in 2010 – 2014 that was bad for economies and markets, yet now a low oil price is also bad for economies and markets? Surely cheap oil should always be a net positive as it reduces the cost of doing almost any business, lowers inflation and reduces the burden on consumers?

In the U.S. a total of 26.5 million people have filed claims for unemployment benefits over the last five weeks. This confirms that all the jobs gained during the longest employment boom in U.S. history have been wiped out as the coronavirus continues to devastate the economy. The American economy created 22 million jobs during the employment boom which started in September 2010 and came to a grinding halt in February this year.

While this week’s number was lower than previously, it feels like we may be at a point where the market is unsure how to react to a better or worse number – does a lower jobless number mean there will be more risk appetite and therefore the USD will weaken to the benefit of the rest OR does it mean that the USA may recover faster than others and hence we’ll see USD demand pick-up? The reaction of the USD index to the data yesterday was muddled to say the least.

 

What others say

 

20 April 2020

Business Maverick – Cabinet faces post-lockdown economic calamity – with no easy options

“While a $1-million Brics New Development Bank loan may be more politically palatable to the ANC-led alliance, it’s nowhere near what’s required. South Africa is looking for $60-million. And even that, some analysts and the opposition DA argue, is far too little to pull South Africa out of the economic dwang.”

21 April 2020

MoneyWeb – What is a negative crude future and does it mean anything for consumers?

“The price of a barrel of benchmark US oil plunged below $0 a barrel on Monday for the first time in history, a troubling sign of an unprecedented global energy glut as the coronavirus pandemic halts travel and curbs economic activity.”

22 April 2020

Business Maverick – Government’s massive economic injection to deal with Covid-19 crisis – reactions

“The president announced a “massive social relief and economic support package” of R500-billion, which amounts to around 10% of GDP. This puts the South African relief effort – as a ratio of GDP – among those of developed nations such as the US.”

23 April 2020

Reuters – Millions of Americans join unemployment ranks as coronavirus ravages economy

“As the economic slump deepens protests have risen against nationwide lockdowns to control the spread of COVID-19, the potentially lethal respiratory illness caused by the virus. President Donald Trump, who is seeking a second term in the White House in November’s general election, has been anxious to restart the paralyzed economy.”

24 April 2020

Bloomberg – South Africa to Ease Virus Lockdown in Bid to Revive Economy

“The country will move from the maximum disease-alert level 5 to a national level 4 on May 1, allowing the phased reopening of some businesses and industries subject to strict precautions, President Cyril Ramaphosa said Thursday in a televised address to the nation.”

What we think

 

Last week we wrote that “direction will largely come down to how the virus plays out over the coming weeks, and assessments of rates should be made regularly.”

For Monday and early Tuesday the ZAR traded largely in a 18.70 – 18.95 range and it really did feel as though breaks in either direction were equally likely. However, it was the bears who prevailed and for some time we shifted weaker into a 18.95 – 19.05 range. Three touches of the 19.17 level certainly gave some cause for concern; however, as at the time of writing we’ve seen a nice move stronger all the way back down to 18.85.

Our first levels to watch at present are 18.70 to the downside and 19.17 to the upside, after which the next target could be the recent high of 19.35.

While we think much of the impact may have already occurred, the one factor which may push sentiment slightly against the ZAR during next week is the reweighting of the World Government Bond Index from which South Africa is being removed.

Our range for the week ahead is therefore 18.70 to 19.35.

 

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Have a great weekend and stay healthy!