Market Commentary: PMK Group

      Market Commentary: PMK Group

      Market Commentary Latest Rates USD/ZAR 17.83 GBP/ZAR 22.12 EUR/ZAR 19.74 AUD/ZAR 10.96



      SA’s first deaths have been reported as the rate of multiplication accelerates. More than 1,200 cases have been confirmed; 35,593 tests conducted. Total cases globally now exceed 722,000. Spain is at the forefront of the crisis, reporting a record number of fatalities for a third day.

      The tide is starting to turn in Italy. The number of deaths reported daily has fallen for a second consecutive day.

      China has firmly plateaued while Gilead (the American biotechnology company) will expand access to its experimental anti-coronavirus drug, remdesivir.

      It’s too early to tell whether quarantine has slowed SA’s rate of transmission. The lockdown has resulted in varying levels of success. Some are too afraid to leave the confines of their homes. For others, life goes on. Adaptation comes at a price, especially for those living on the bread line. Our options to respond to the virus, though, are limited. SA suffers severe constraints to growth and has limited fiscal flexibility, manifesting in an increasingly unsustainable debt burden – a realisation that led Moody’s to downgrade the sovereign to non-investment grade last Friday (not a surprise).

      Remarkably, SA’s outlook was kept on negative, a surprise to most analysts. Yet, Moody’s assessment is reasonable, considering the recent rapid deterioration in growth and fiscal fundamentals, aggravated by both the coronavirus and a lack of agreement on the wage bill.

      The situation presents an almost impossible funding task for the National Treasury. Yet the Ministry has displayed humility and sound judgment by taking “no ideological position in approaching the IMF and World Bank.” The Minister of Finance believes that SA should take advantage of the facilities being made available in order to relieve growing pressure on the fiscus to facilitate health interventions. This, however, would not constitute a typical bail-out, a fact that the minister stressed in a virtual conference last night. Perhaps the downgrade is a catalyst for much-needed structural reform. The president believes so. Yet, the end state remains unclear, especially as SA sinks further into recession.

      References: PMK investment committee, Exchange 4 free , Momentum Investment Consultants, Momentum securities, RMB Global Markets

      Policymakers are mindful of the stress that the virus has created. The SARB, having enacted measures to relieve liquidity stress last week, has committed to easing capital and regulatory rules to allow for roughly R300bn of funds to be released into the banking system. The support will provide welcome relief to overburdened households and SMMEs.

      Despite these interventions, the local market is naturally softer this morning, as Moody’s pronouncement echoes in investors’ ears and the global backdrop remains erratic. USD/ZAR’s break of 18.00 was prophesised following a downgrade, but has eased slightly alongside other EM indicators. Expect trading to be volatile with breaches of 18.00 the norm.


      Oil crashes: storage scarce as producers are slow to wind down.

      The implications of talk of 100k to 200k deaths in the US are beginning to sink in as the virus rages in the West. At one stage Brent was down 6% to $23.02/bbl, the lowest since 2002. Traders believe the surplus could reach 25 million barrels per month.

      China urges Banks to aid ailing businesses- Many Chinese banks capital adequacy ratios are already on the borderline as they brace for a surge in non-compliance. Fitch expects non-performing Loans (“NPLs”) to rise from 1.5% to 3.5% which, although by means not outrageous, would be enough to push Tier-1 ratios below the threshold at mid and small sized banks. Looks like some innovation in banking regulations will have to happen.