February 28, 2020
Market News 28 February 2020
What we know
With markets collapsing faster than the Protea’s batting line-up, it’s stating the obvious to say that panic and uncertainty sums up current sentiment.
Last week, in reference to COVID-19, we wrote that “…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.”
Well, it’s been quick and brutal:
- European equities have had their worst week since 2008, losing over 12%
- Wednesday saw the DJ Index lose 1,191 points, the biggest one-day drop in its history
- Brent, having recovered some of its recent losses, was off almost 13%, threatening to break below $50 per barrel
- Locally, platinum stocks lost 22%
- The main emerging market currencies lost 2% – 3.5%, bringing the losses for the month to anywhere between 3% and 7%
After last week’s rush to the relative safety of gold and the USD, the JSE gold index lost 17%, with bullion itself giving up 3.3%. The greenback also gave up 1.3%.
The only safe-haven has been in treasuries, where multi-year low yields have been seen. Consensus is that governments will have little choice but to introduce (or continue) supportive measures to ensure global economies and markets are not overwhelmed by the continuing negative impact of the disease.
And so it was that Tito Mboweni’s budget speech, for so long such a key event on our economic calendar was (just about) overshadowed by world events. Indeed, it’s easy to forget that the immediate reaction to the announcement was positive as the ZAR rallied over 1% to touch 15.09.
The budget itself was generally well received, with many grateful to see taxes largely unchanged and the public wage-bill being cut (pending union “approval”!). Even the unequivocally negative announcements, including an even worse than previously expected deficit of 6.8%, were received with a degree of acceptance and understanding that we face a long, challenging road of incremental victories and gradual improvements.
Against this background it is again a case of “will they or won’t they” when Moody’s announces it update on 27 March. To its credit the agency has positioned itself in such a way that all options remain on the table: on the one hand they’ve continued to be patient and pragmatic in their approach over the past few years, while on the other hand, their more recent announcements have demanded signs of growth and policies in order for the country to stave off a downgrade.
It really is anyone’s guess now as to whether patience continues to prevail. We feel that given the current messy state of the world, Moody’s may very well decide to not add fuel to the fire and that we will once again avoid the cut.
What others say
24 February 2020
BusinessMaverick – JSE bloodbath: It’s not just the coronavirus
“While the World Health Organisation has praised China for its efforts to bring the virus under control, last week’s stronger US dollar and weaker bond yields suggested that markets were not convinced the impact was as benign as China has suggested.”
25 February 2020
Moneyweb – Rand weaker ahead of budget speech
“At home, traders were nervous that a bleak fiscal picture in Wednesday’s budget speech by Finance Minister Tito Mboweni could trigger a downgrade to “junk” of South Africa’s credit rating by Moody’s, the last agency to rate the country investment grade.”
26 February 2020
Bloomberg – These Charts Show South Africa’s Tough Budget Task
“Moody’s Investors Service in November gave South African Finance Minister Tito Mboweni just under four months to come up with a credible plan to rein in government debt and get the economy growing.”
27 February 2020
BusinessMaverick – Progressive Prosperity: Mboweni treading on thin ice
“Economists debating Budget 2020 seem polarized around whether the budget needs to impose austerity or expansion. For some, austerity is the way back to health: for them, fiscal expansion is impossible since the state must at least halt deficit growth by cutting R150-billion out of the budget. Others say austerity has already caused slow growth and falling living standards: they believe the budget should be expansionary funded through rising taxes or borrowing.”
28 February 2020
Reuters – World faces coronavirus pandemic; markets brace for global recession
“A Reuters tally showed about 12 countries had reported their first virus cases in past 24 hours, including the first case in sub-Saharan Africa – that of an Italian man in Nigeria – as well as New Zealand and Lithuania.”
What we think
Last week we wrote that “…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”.
We’ve now come full circle with regards to our outlook. Having started the year believing that clients should externalise funds anywhere from 14.00 or better, all the way up to 14.70, we became fairly neutral when we settled into the 14.70 – 15.10 level.
We have now moved the other way, and for the first time since October, feel that clients should be exercising caution in externalising funds above 15.30. We can of course be wrong – global pandemics are not our speciality after all! – however for the time being we wonder whether the market reaction has not perhaps overshot to the downside. Any positive developments (and we’ve not seen anything of the sort for weeks now) could see a similarly sharp recovery in risky assets.
At the risk of looking very silly in a few days, our range for the week ahead is 15.10 – 15.50.
Have a great weekend!