July 28, 2021
Market News 27 July 2021
What we know
Financial markets have swung from one direction to another in the last few weeks as investors try to assess what the surging Delta variant means for the world economy. Domestically, now that the dust has settled after the recent civil unrest, questions still linger about what lessons should be learnt from recent events. Some things will change and others will stay the same. Unfortunately, some of the changes made will be mistakes; and some of the things that need to change will stay the same. As we march steadily on through the second half of the year, we can only hope to see that change we have been so eagerly seeking for so long.
Last week we saw the Rand close off near three-month lows after the SARB pushed back the likely timing of any post-crisis interest rate rise. The Reserve Bank kept its GDP forecast stable at 4.2% in 2021 and Core inflation was adjusted lower to 2.9% in 2021. The forecast revisions were a bit more bearish than most economists had anticipated. This is potentially a big part of why the market appeared to have lost enthusiasm for the Rand. The inflation targets the bank is seeking to manage with its interest rate policy, and the tame outlook for price pressures creates scope for further delay and an even later lift-off for the interest rates than the SARB’s model advocated last month.
What others say
Daily Maverick – SA remains the master of its own economic destiny
Worryingly, the glacial pace of South Africa’s structural reforms could exclude the country from benefiting from the tailwinds of the post-pandemic global recovery. However, as calls from the privatisation faction to implement favourable policies grow louder and more vociferous, these warring ideologies simply get pushed further to the fringes and stifles productive debate.
Bloomberg – Tired of the inflation debate? Try this instead
Some economists believe high single-digit inflation awaits us by the end of the year, although they are still in a minority. Strip out obviously transitory elements, and current price rises are still in the low single digits. But this exercise is a salutary one. Equities might do better than bonds in conditions of rising inflation; they’re still unlikely to do well in absolute terms.
MoneyWeb – Tax implications arising from the devastating insurrection and carnage
Chong explains: “Insurance payments from Sasria to replace the lost plant and machinery would be a deemed supply where the vendor claimed input Vat on the acquisition of the plant and machinery. The taxpayer would need to declare output Vat on receipt on the insurance payments as a result of the deemed supply.”
Bitcoin Magazine – Bitcoin transfer volume now exceeds $15.8 trillion
In 2021, the uptick in institutional interest along with significant growth in retail investments helped to bring bitcoin transfer volume to $15.8 trillion in less than seven months of this year. Moreover, U.S. corporations’ strategy of holding bitcoin on their balance sheet to reverse the impact of inflationary fiat dollars and rising consumer costs added to bitcoin transfer volume.
What we think
Last week we stated that “Although under significant pressure still, the Rand seems to be doing much better than anticipated given the rather bleak backdrop”.
After a slow start to the week, the news-starved market will soon have some more data to feed off on Wednesday, when US monetary policy will be in the spotlight and will be the major market mover this week.
Markets are bracing for more potential turbulence as the Federal Reserve prepares to step back into the fray. It is clear though, that US monetary policy will be as accommodative as it is going to get through this cycle, and that the next direction, as with many other central banks, is toward normalisation.
The uncertainty remains the timing and the pace. However, given how severe the Covid-19 economic recession hit has been, there will no doubt be robust discussions before any action is taken. The path toward normalisation will be a narrow one with policy makers in the US – as well as elsewhere – having to balance between ensuring that demand driven inflation doesn’t heat up too much, while equally ensuring that monetary policy normalisation does not disrupt the economic recovery.
The Rand recovered slightly overnight to R14.77/$ following yesterday’s fallout, which saw the USDZAR briefly touch 15.00. This volatility reflects the uncertain trading environment investors are navigating at present, as they weigh concerns over the impact the ongoing spread of Covid-19 will have on the global economic recovery, against bets that the Fed is not ready to signal monetary tightening as yet.
Some positive sentiment in the local market may come from signs that the domestic third wave is moderating and the push to resume normal operations economically after recent civil unrest is underway.
Further, after Sunday’s family meeting with the President, it is clear that the government has realised it needs to look further than just Covid-19 and we are to expect details on the resumption of the Covid-19 distress relief grant of R350 through to March 2022 (funded by the windfall in revenue collection from higher commodity prices) as well as government’s plans to help uninsured businesses get back on their feet after the riots and destruction in the country two weeks ago.
The week ahead will also see the IMF release an interim update on its World Economic Outlook. In April, the Fund saw the world growing by 6% in 2021 and 4.4% in 2022. With emerging market economies understandably lagging in the vaccination race, portfolio flows to EM have been in reverse over recent weeks, which is another factor why the Dollar may stay supported near term.
Our range for the week is 14.70 – 15.10.
Have a great week!