Market Commentary: PMK Group

Daily Market Commentary Latest Rates USD/ZAR 18.84 GBP/ZAR 23.20 EUR/ZAR 20.36 AUD/ZAR 11.44

SA

2020-04-06

The South African rand is by far one of the worst-performing currencies in the world. Alongside its equally beleaguered twin, the Mexican peso, the rand has surrendered 27% of its value this year, with more than 7% of those losses incurred over the last five days and one-month implied volatility on the rise once again. Whether by misfortune or pure chance, the local unit is splintering at 19.30 against the US dollar (currently below 19.00), with little to prevent a sudden jolt to 20.00, despite this morning’s modest improvement in risk sentiment, after SA was inflicted yet another body blow by Fitch on Friday and the number of covid-19 cases hurdled past 1,650.

Fitch is perceived as the lesser brother to S&P and Moody’s, whose ratings impact SA’s standing in global securities indices. Yet, their assessment of risk should still be noted. To have three credit agencies, independent in their thinking and respective methodologies, think SA to be of sub- investment grade standing because it lacks a “clear path towards” stabilising its debt position, is disturbing.

Their critique is not unfounded. SA’s public finances are in dire straits and there has been a severe deterioration in SA’s trend growth, a reality not unbeknown to the National Treasury, which is “seized with addressing and minimising the impact of covid-19”. Except, our ability to finance our existing debt load and support health efforts to minimise the impact of local transmissions, is perhaps well beyond the reach of the debt-market.

Bilateral assistance is a viable albeit costly consideration, depending on the agency, type and tenor of loan. Several agencies have been named as potential sources of aid to help root out the virus tearing through our towns. Still, the Ministry of Finance will need to be discerning in the partners it chooses given the political sensitivities. The IMF, ADB and World Bank are names being bandied about with the BRICS bank being added to the mix after offering a US$1bn loan to help calm the public health crisis in SA as it did in China.

Perhaps the domestic market will take kindly to an extension of support, providing a welcome reprieve to the general fatigue. SA, like its EM peers, might miss out on the exuberance being expressed in other markets this morning, which have welcomed the decline in covid-19 cases reported across critical points in Europe like Italy and Spain. We advise caution though.

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

It might be too soon to celebrate a supposed flattening of the curve since the improvements are on the back of stringent lockdown measures with economies unlikely to rebound sharply once restrictions are removed. Singapore is another cautionary tale following a resurgence in cases that will see the country go into a one-month lockdown on Tuesday.

The point is the environment is far too positive today, warranting concern as to the boomerang effect. The upturn in S&P futures is almost ignorant of the risk expressed through the dismal US non-farm payrolls figure last Friday or President Trump’s warning of the most “horrendous” week ahead. The Brent crude price remains in no-mans land as the Russians and Saudis continue to wrestle for power, despite assurances from referee Trump of an impending tap out (see more below).

Global

The FT’s Wolfgang Munchau points out that the Germans have tested, tested and tested again thus preventing their own hot spot at Heinsberg near Cologne from becoming another Bergamo.

They have increased the rate of testing to 350,000 a week having tested nearly 1 million to date. The French have tested less than a tenth of that number. Yet he then goes on to mention factors which could lead to an unexpected outcome and quotes Dr Robert Grant a British medical statistician who said “I’ve studied this stuff at university, done data analysis for decades written several NHS guidelines (including one for medical diseases) and taught it to health professionals. That is why you do not see me making any coronavirus forecasts.”

Even as Johnson is hospitalised and some European countries are considering lockdown exit strategies, questions are being raised as to the wisdom of lockdowns everywhere. FT writer David Pilling says, “In an era of group think, where not to impose lockdowns risks accusations of mass killing, it is at least worth asking the question asks Pilling (See Plaas’s concerns below).

Yes, Trump still expects the Saudis and Russians to cut production.

Moreover, to “encourage” them to consider production cuts he is mooting import tariffs on their oil. Despite trading barbs in public with each other the Russians and Saudis are apparently still negotiating cuts so Brent is still above $32/bbl.

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