February 03, 2020
Market News 31 January 2020
What we know
It’s tough out there! No sooner had the dust settled on a fantastic December for the Rand, that January came out fighting to give the local currency a good kicking. Already this year we’ve had the havoc caused by the fires in Australia, US-Iran tensions escalate, moves towards the final stages of Brexit, Trump’s impeachment and now the coronavirus.
January has not been a particularly happy time for the ZAR of late. This will be the 9th losing month in the past 14 years (versus 4 winners), with the average and median losses being 2% and 3% respectively. Nevertheless the 6% loss we’re about to record is certainly up there with the worst we’ve seen.
As of the time of writing the ZAR has lost 2.8% on the week, as global markets have quickly moved into a risk-off stance: equity markets, particularly in the Far East, have slumped. Gold is up 2% this week, emerging market currencies have sold off and Brent has again moved below $60 a barrel. Amazingly, it is now trading 20% below the $71 level seen at the height of the Gulf tensions 3 weeks ago.
In this kind of environment, it becomes very hard to make any predictions as to where we may next be headed, as there is a very high-stakes macro-event underway, the outcome of which no one can predict for certain. Should the virus be contained quickly, we most certainly will see a recovery in those risk assets most affected (the ZAR included); however, should this develop into some kind of doomsday scenario the negative impact on the world and global economy could be severe, with much larger sell-offs to follow. While we do have one qualified food scientist in our office, we unfortunately know no more than anyone else and will simply need to wait and see.
Within this broader context the ZAR has underperformed its peers over the past 5 days. There are two main possible reasons for this:
- It’s a reflection of the Rand’s high liquidity and tradability, which in turn makes it a good proxy for other emerging currencies and a relatively easy way for investors to take some risk off the table. As a result when there are big risk-off (or risk-on) events taking place globally, we may under- (or out-) perform our peers.
- As we move closer to next month’s budget, now less than 4 weeks away, and a possible downgrade thereafter, investors are giving up the high yield on offer, in favour of protecting themselves against a negative outcome and subsequent ZAR sell-off.
Having seen Richard Quest ask Bruce Whitfield in Davos “what credibility?”, in reference to the South African government, it is clear that the stakes are as high as they’ve ever been, in terms of Cyril and Tito needing to convince global investors that they have plans to get us out of the current mess.
What others say
27 January 2020
Business Maverick – The WEF and the confidence conundrum
“For the first time, more than half of the CEOs surveyed believe the rate of global GDP growth will decline. This caution has translated into CEOs’ low confidence in their own organisation’s outlook. Only 27% of CEOs are “very confident” in their prospects for revenue growth in 2020, a low level not seen since 2009, PwC recorded.”
28 January 2020
Bloomberg – I Said Don’t Panic. I Didn’t Say Don’t Worry
“The path of similar disease outbreaks in recent decades has followed a recognizable market template: There is a sell-off that lasts until concern reaches a crescendo, and the outbreak comes under control. Then it is time for a recovery. Sell-offs driven by previous epidemics have created buying opportunities. That is plainly the base case that many are still using, and Monday’s 1.62% drop in the MSCI All-World index doesn’t look excessive.”
29 January 2020
MoneyWeb – Moody’s: too early to assess SA’s progress
“Moody’s will look to the February 26 budget review for details on how the government will contain spending and bolster revenue, Villa said. While Mboweni is redoubling efforts to cut the state’s payroll costs, which make up 35.4% of national spending, the current three-year agreement may be difficult to change, she said.”
30 January 2020
Reuters – U.S. economy misses Trump’s 3% growth target in 2019
“The report comes on the heels of the U.S. Federal Reserve deciding to keep rates unchanged. Fed Chairman Jerome Powell told reporters on Wednesday the U.S. central bank expected “moderate economic growth to continue” but also nodded to some risks, including the recent coronavirus outbreak in China.”
31 January 2020
MoneyWeb – It’s Brexit Day…
“Initially, nothing practical will differ. EU rules will continue to apply until the end of the year, under transitional arrangements. But culturally, legally and, perhaps, emotionally, the UK will experience an earthquake, instantly becoming a different country, when the divorce is complete.”
What we think
Last week we wrote that “Given our ongoing concerns as the budget and Moody’s loom nearer, together with the Dollar seeming to have stabilised, we believe the odds continue to favour the ZAR drifting weaker”.
It’s nice to be right. However, while our call for a weaker ZAR over the past 2 months has been consistent and is finally coming to bear, we cannot say it’s for the reasons we had in mind. Indeed, should the global crisis abate, we would expect a fairly quick retracement to the 14.50 level. Nevertheless, as things stand we’re headed for our worst daily close since mid-November with the ZAR at 14.87 at the time of writing and of course we don’t know what developments the weekend will bring.
While we’ll hopefully be writing from a more positive position next week, at times like these our ranges will necessarily be wider than usual and our outlook for the week ahead is 14.50 – 15.00.
Have a great weekend!