Market News 26 October 2020

What we know

 

In a week that had little in terms of economic releases, the ZAR rallied to its best levels in a month on Friday, recording a weekly gain of 1.5%. Trading throughout the week was healthy as the Rand ground consistently firmer, ending the week trading around the 16.2100 level. There was a sense last week, with the dollar selling off across the board, that investors are becoming increasingly confident of a Biden win on 3 November and were already positioning for dollar weakness in the short- to medium-term.

 

A busy fortnight ahead

A bit like end-of-year academic exams, the big test for the Rand is now imminent:

Mid-term budget update

The government will be unveiling its latest budget and economic forecasts on Wednesday, and there will be renewed market focus on South Africa’s deteriorating financial position, which will remain a burden no matter the pace of recovery. The Rand would likely depreciate markedly on shifting to a debt peak of 100% of GDP. A 100% of GDP, or higher, is not deemed at all sustainable for an emerging market, and SA will be viewed no differently.

US election

After a far more civilised final presidential debate last week (off an incredibly low base!) the end of this saga is now finally in sight. As bad as the pandemic has and continues to be, many people also seem fatigued by the never-ending campaigning and cheap-shots that have marked the campaigns of both nominees. What does seem to be becoming clear is that, as tainted as Trump may seem to be, there is way too much smoke around Biden at the moment for him to avoid severe scrutiny in the coming months, irrespective of whether he wins or not.

Our feeling is that the polls will prove to be correct and Biden will become president, at which point Trump will declare the entire election a farce and dispute the outcome. We could then easily see a delay in the final confirmation of the result, during which markets would likely respond negatively and risk appetite would decrease. It is this scenario that causes us to expect the Rand to have a wobbly November.

Limited reaction to the pandemic

Corornavirus developments in SA and across the globe remain a major concern, as second waves of infection are threatening to bring about a final quarter economic contraction in the UK and Europe. The upward trend in confirmed US cases continues, thanks mostly to an increasing test positivity rate. The daily number of third wave cases is on track to exceed the second wave peak, and therefore hit a record high.

In the UK cases are rising less quickly than in most of continental Europe, and the rate of increase has slowed marginally as the results of large-scale testing of college students has dropped out of the numbers. Interestingly, however, markets seem to be largely taking the pandemic in their stride, with negative headlines having seemingly limited impact at present.

 

What others say

 

Business Tech – How the 2020 US election will impact South Africa and the rand

While $9 billion worth of trade is estimated to transact between the two countries, the Trump administration has reviewed the agreement and identified South Africa as being restrictive and as such, agreement renewal in its current form would not be guaranteed under a Trump administration.

Financial Times – US records worst COVID-19 week since summer peak

The worst-hit region in the latest spike continued to be the Midwest, where some of the key battleground states in the presidential campaign posted record one-day increases in new infections on Friday. Those jumps pushed the nationwide tally to 83,010 new cases, according to the COVID Tracking Project, a record one-day rise.

IOL – Minister Mboweni in tight spot over MTBPS

Finance Minister Tito Mboweni is riding the storm with political parties calling on him to stick to his guns and cut spending in the wake of the impact caused by COVID-19. Mboweni will on Wednesday present the Medium Term Budget Policy Statement and is facing a tough situation with rising unemployment and demands for government interventions.

Bloomberg – Pelosi, Mnuchin trade blame on unending stimulus stalemate

Treasury Secretary Steven Mnuchin, Pelosi’s primary negotiating partner, said there’s been significant progress but blamed the California Democrat for holding up an agreement by not compromising on her party’s priorities. “We’ve offered compromises,” Mnuchin told reporters at the White House. “The speaker, on a number of issues, is still dug in. If she wants to compromise, there will be a deal.”

What we think

 

Last time we wrote that “…it does appear as though the market is in somewhat of a ‘holding pattern’ at present” as we continued to trade in the 16.40 – 16.70 range.

Last week’s price action saw a nice grind stronger, and following those healthy gains, the most important potential bullish target for the Rand is the 16.08 best level seen on 18 September. Should we be able to reach that level, we would expect that to provide support against any further Rand gains in the short-term.

With some of the risks outlined in the previous section certain to dominate investors’ attention in the coming weeks, we struggle to see the case for further ZAR gains, unless of course the USD itself continues to weaken more broadly. While the budget update on Wednesday is also very important, we’d also expect the market reaction to be fairly muted either way, unless we see an unexpected major surprise from Tito – either positive or negative. Given current circumstances and sentiment, this does seem unlikely.

So despite everything going on at the moment, we’re actually expecting a fairly orderly week before the potential fireworks start next Tuesday.

Our range for the week ahead is 16.08 – 16.55.

 

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Have a great week!