May 29, 2020
Market News 29 May 2020
What we know
Having struggled to eke out consecutive weeks of gains all year, the ZAR has now managed (at the time of writing) to move stronger against the USD for 4 of the past 5 weeks. Since the lows on 6 April, the rally has extended to 11.5%, while we have gained 5.7% during the past week alone.
The rally in global equity markets has continued again this week, with the result that off their lows, the S&P 500 has gained 38%, Euro Stoxx is up 30%, Nikkei 31%, JSE All Share 35% and the MSCI World Index +33%. Oil has doubled since it bottomed out and in recent weeks the traditional safe-havens of the USD and Gold have started to edge lower. Another volatility and risk indicator, the VIX on the S&P 500, has also subsided to and hovered around levels seen in early March.
The implication of this is that the main drivers of the Rand at present are global factors and, ultimately, the extent to which investors believe that we’ve seen the worst of the recent crisis and are therefore willing to assume more risk.
China in a feisty mood
Perhaps they’re feeling somewhat boxed into a corner at the moment and that the best form of defense is attack, as we’ve certainly seen China go on the offensive recently. They responded to Australia’s request for an investigation into the origins of the coronavirus, by threatening trade-related responses, and followed that up with last week’s proposals regarding Hong Kong’s national security bill.
Given the precarious global economic situation and the looming US elections, there is a real risk of tensions continuing to ratchet up and of the US taking action. When one considers how markets reacted to last year’s trade spat between the US and China, this certainly remains a risk to global stability and markets going forward. We find it interesting that the market seems to be largely ignoring this threat thus far.
ZAR still grinding stronger
Another week of steady gains despite a few struggles between the ZAR bulls and bears along the way. The worst levels were seen on Monday afternoon, as we touched 17.73 having opened at 17.60. By Tuesday morning, however, the Rand settled into the range of 17.35 – 17.50 where the bulk of trade has since taken place. It’s been interesting to watch as any 5c – 10c move in either direction has quickly been met by buyers or sellers seemingly intent on pushing it in the other direction. At the time of writing, the best level we managed to see was just below 17.30 yesterday morning; however, after further consolidation, a weaker than expected US GDP figure finally saw something of a sell-off.
What others say
21 May 2020
Business Live – DA’s circus of ‘Coronacast experts’
“It’s been a week of some pretty astonishing drivel from politicians and their buddies. John “I Squeak for You” Steenhuisen, the temp worker the DA has called in to keep the party limping along while it looks for someone more capable, hosted what the party has wittily decided to call a “Coronacast”.”
22 May 2020
The Guardian – Why Sweden is unlikely to make a U-turn on its controversial COVID-19 strategy
“International observers and critics within Sweden blame these depressing figures on its controversial COVID-19 strategy. Unlike the rest of Europe, or what is often cited as the exemplar nation of South Korea, Sweden has not imposed any lockdowns nor carried out mass testing. Its policy has been to slow the spread of the virus by exhorting its citizens to practise voluntary social distancing.”
23 May 2020
Business Insider – Hertz files for bankruptcy in the US as the coronavirus crushes the car-rental industry
“Hertz filed for Chapter 11 protections in the US Bankruptcy Court in Wilmington, Delaware, making it one of the largest corporate casualties of the coronavirus pandemic’s widespread economic fallout as travel restrictions decimate the rental car industry.”
27 May 2020
Zero Hedge – How the Fed unleashed a “Schrödinger Equilibrium” between the economy and markets
“In 1935, Austrian physicist Erwin Schrödinger, trying to make the case that some people were misinterpreting quantum theory, designed a hypothetical experiment, famously known as the Schrödinger’s cat experiment. In a nutshell, the experiment goes, if you place a cat and something that could kill the cat (a radioactive atom) in a box and sealed it, you would not know if the cat was dead or alive until you open the box, so until then, the cat was in a sense both dead and alive.”
28 May 2020
CNN – In Hong Kong and beyond, China moves to consolidate position of strength as country emerges from pandemic
“As much of the world continues to reel from the coronavirus pandemic, China is flexing its muscles in Hong Kong, the South China Sea and along its border with India, all the while ramping up aggressive rhetoric towards Taiwan and the United States.”
What we think
Last week we wrote that “…we’d be comfortable seeing more trade in the 17.70 – 18.00 range before making a strong call on the short- to medium-term outlook. The longer we are able to hold below 17.80, the more bullish we would become for a medium-term range of 17.20 – 17.80. To the weaker side, previous support at 18.20 now becomes a fairly strong resistance level and it’s certainly possible that we may see that level retested in the coming weeks, particularly as China / US tensions seem set to heighten following China’s recent pronouncements regarding Hong Kong.”
Given our range for the past week was 17.60 – 18.20 we clearly got it wrong this time. Nevertheless we continue to hold our view that the move below 17.60 is somewhat overdone. Since the global lockdowns and market turmoil began, we have maintained that when things start to settle down and confidence begins to return, that the new normal for the Rand could be in a 16.00 – 18.00 range.
When this would transpire was obviously a difficult question and we thought that such a situation was probably 12 – 24 months away. In other words, the discrepancy between our view and the way the market has responded over the past couple weeks is more to do with timing and the return of risk appetite than what the “right” level is for the Rand. We believe that there is still too much risk and uncertainty, at both a local and global level, to justify trading in the low 17.00’s.
Our range for the week ahead is therefore 17.20 – 17.80.
Have a great weekend!