Keep calm and watch the markets

What we know

Monday evening saw the much anticipated unveiling of President Ramaphosa’s new Cabinet.  Many were surprised that the tardiness of Cyril’s predecessor was in evidence, as the announcement was delayed a number of times – there were whispers that this was due to last-minute consultations with the SACP and/or discussions with senior party members.  Either way, it took all of half a second for Julius to jump onto Twiiter suggesting that “Cyril looks like a defeated man”.

The response to the Cabinet announcement was fairly uniform:  a “compromised” cabinet consisting of some very good appointments alongside some surprises and unpopular choices, probably made to ensure unity amongst the party – an issue of vital importance heading into next year’s election.

The other big market focus this week was around “land expropriation without compensation”, which was given fresh impetus by the National Assembly adopting a motion to review elements of the Constitution relating to property ownership.

The above factors resulted in the first real ZAR sell-off we’ve seen for a number of weeks, as (possibly overly) positive sentiment surrounding the currency showed signs of waning.  At the time of writing we’re around 1.5-2.0% weaker against the EUR and GBP and 4.0% weaker against the USD.

What others are saying

26 February 2018

AOL | Business Report – We cannot afford such a strong currency

“Although Cyrilnomics is likely to improve consumer and business confidence the very tight budget is likely to dampen sentiment and economic growth…The only tool left to help the economy along is a softer stance by the SA Reserve Bank’s monetary policy committee by cutting lending rates.”

Pound Sterling Live | report – South African Rand at Risk of Decline versus Pound this Week

“Ramaphosa might find that his honeymoon period with investors and financial markets might not last as long as he hopes – the time for action is fast approaching and any disappointment could see the Ramaphosa effect on the rand fade.”

27 February 2018

Business Tech article – Why the rand is subdued after Ramaphosa’s cabinet reshuffle

“The bias for rand strength will remain in the short term as the field is dominated by key political events, however we do foresee some division in the ANC as Ramaphosa moves to clean up government moving forward which will see some tension remain in the market,” said Peregrine Treasury Solutions

“What happened on Monday evening can be compared to a situation where hostages are handed over to a new set of handlers, mid-way through their ordeal, who seem friendlier, generous and more humane in the way they treat them.”

28 February 2018

Investec Morning Reports

“…In a rebuff to the govt’s official optimism over the budget outcome, Nene said it was “too early to say” if a downgrade by Moody’s will be averted with the agency still slated to review at the end of March. This aligns with our concerns that markets have turned excessively optimistic now with the agencies looking on SA fiscal dynamics with much more jaundiced eyes.”

Fin 24 | report – New Public Enterprises Minister Gordhan set to bring measure of stability to Eskom

“Ernst & Young African Mining and Metals leader Wickus Botha said the appointment of Gordhan did not come as a surprise” … “Gordhan is seen as Mr Fix-It and our state-owned enterprises have some of the biggest problems,” he said.

01 March 2018

Global Markets Daily: Dollar surge pushes rand weaker

“The US equity price correction in early February must remind us how fickle markets are and, in turn, how vigilant we must be in gauging the next dollar direction…We worry about this because the local market seems stuck — looking inward at the local positive changes and expecting further rand gains — forgetting that much of what drives our local markets are global factors, the US dollar being one of them.”

Slightly off-topic tid-bit 

Bloomberg | report– People in Sweden Now at Risk of Losing Access to Notes

Sweden is moving toward a situation where “the public’s means of payments is controlled by commercial parties,” Ingves said in an op-ed in Dagens Nyheter. “That could become problematic, especially in a crisis situation.”

What we think

Nothing much has changed from our view last week that “trade a few percent either side of 12 represents a sustainable re-setting of the ZAR”, albeit that the market has perhaps reacted somewhat more negatively to the new Cabinet than we would have thought, given the likelihood that some appointments were always expected to be more about maintaining unity within the ANC than politically correct.

Much of the commentary is now re-iterating what we have been saying for some time:  that the hard work starts now.  The economic challenges that lie ahead are very real and even if we do see improvements, we must bear in mind that such changes are coming off a very low base.  Furthermore, the Land Reform issue and other politicking are likely to heighten the sense of uncertainty in the coming months.

Further consideration and caution should be give to the following two global factors:  Firstly, we believe the USD is overdue a recovery following months (and in fact years) of weakness.  If (or when) it recovers, broader global investment flows will see a move to the green-back with outflows from emerging market countries including SA.  Secondly, signs of a breakthrough in Brexit talks could see either (or both) of the GBP and EUR rally as uncertainty is removed with a resultant similar impact on emerging market currencies.

It is important to remember that it is not always all about SA and the ZAR and that these two factors could have a significant negative impact on the ZAR.

All things considered, we believe the current ZAR levels will hold with possible moderate weakening over the coming weeks.

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Have a great weekend!