MARKET COMMENTARY

Every now and then, the elements align, creating either the perfect storm or otherwise leading to perfect blue skies amidst stormy weather, and this week can fortunately be described as the latter.

In treacherous economic times, beset by global uncertainty, growth constraints and trade disputes, by some miracle all events favoured the local unit this week, ranging from a dovish US Federal Reserve to clear optimism from ratings agency Moody’s with regards to the outlook of the local economy.

This harmonious alignment assisted the currency to gain 3% during the week, recovering to levels above the fair value of the rand against major currencies.

GLOBAL DATA AND POLITICS

Trade wars remain top of the agenda for market participants, with focus now shifting to the G20 summit which is due to kick off in Japan on June 28. However, the chances of the United States and China concluding an agreement at the summit remains slim, and analysts expect President Trump to drag out the trade war for as long as possible as part of an election ploy.

The key data event for the week was without a doubt the Federal Reserve interest rate announcement that took place on Wednesday, following on the back of remarks made by President Trump regarding the interest rates, as well continuous pressure on growth.

And while the Federal Reserve did not cut interest rates this time around, the dovish stance by the Fed was certainty reiterated, implying that a rate cut by as much as 50bps could be on the cards towards the end of the year. Initial US jobless claims also outperformed, dropping to 216,000 from the previous week’s 222,000, while the services and manufacturing PMI data is due for release later today.

Lingering fears of a no-deal Brexit continue to haunt the UK, and the anticipated cost of a hard exit continues to weigh heavily on confidence as the financial implications grow more devastating by the day. UK retail sales figures undershot expectations, expanding by just 2.3% year-on-year during May, while CPI marginally declined to 2% year-on-year from the previous 2.1% in April. The Bank of England (BOE) further added to market jitters by reducing its growth forecast to 0% for the first quarter of 2019.

Central banks have been making headlines over the past two weeks, with the European Central Bank (ECB) indicating that quantitative measures are being considered to aid the ailing European economy – much to the dismay of US President Donald Trump, who labelled the announcement as “unfair” to the US. The EU recorded an increase of 2.5% in wages year-on-year during the first quarter of 2019, incrementally improving on the previous quarter’s annualized figures. Combined CPI was in line with expectations being at 1.2% year-on-year during May, and the EU manufacturing and services PMI is also due for release later today.

Shifting our focus to emerging markets, the Quarterly Jobless Average in Turkey remained high at 14.1%, while industrial production declined 4% year-on-year during April and retail sales for the region contracted by 6.9% over the past year.

The Russian economy also remains under pressure, as industrial production undershot targets year-on-year, growing by a mere 0.9%, and lacklustre quarterly economic growth of 0.5% remained in line with market expectations. However, both retail sales and unemployment figures performed marginally better than expected, coming in at 1.4% and 4.5% respectively.

US EQUITIES

While world stock markets gained on Thursday, the US based S&P500 soared to rocket highs gaining 0.54%, as markets digested the dovish stance by the Federal Reserve. The Dow Jones Industrial index gained 0.55% while the Nasdaq added 0.47%

The top gainers that contributed to the spike in the S&P500 included:

  • Oracle (+8.28%)
  • Chesapeake Energy (+6.56%)
  • Pacific Gas & Electric (+5.5%)

While components of the Dow 30, including Coca Cola, IBM and Chevron assisted the rally in the index by adding 1.21%,1.15% and 1.11% respectively.

 COMMODITIES

Thursday held some upside for commodities, with Gold, Silver, Copper, Platinum and Brent Oil all closing in the green, while Palladium ended the day off softer.

The US/Iranian tension assisted oil prices to rise, as news that a US drone was shot down over Iranian airspace made its way to the market, raising fears of a full blown military fallout between the two nations that could see the supply of oil stumble. The rally in the oil price was further fueled by the potential rate cuts that will see growth and subsequently  demand in the world’s largest oil consuming country – the US – rise.

On Friday morning, gold, platinum and palladium were trading at levels of around $1,408.85, $811.10 and $1481.90 per fine ounce respectively, while Brent Oil was trading at $64.31 per barrel.

SOUTH AFRICAN FUNDAMENTALS

President Ramaphosa’s much anticipated State of the Nation Address left many South Africans with perhaps even more questions than before the address. While the tone of the address was upbeat and positive, the country remains in the dark as to what exactly the turnaround plan for the economy will entail.

Ramaphosa did a tremendous job of painting a picture of a bright South African future, with opportunities for each and every citizen, but despite outlining the goals and objectives for the current administration, he failed to clarify exactly what the content of the address meant.

In order to clearly understand and objectively analyse the address, we need to unpack the immense amount of information communicated by the President, examining the what, the why and most importantly the how:

The what:

President Ramaphosa named seven key policy drivers, namely:

  • Education
  • Economic transformation
  • Social wage consolidation
  • Local government improvement
  • Improved social cohesion and community safety
  • An ethical and capable state
  • A better Africa as a whole

He then outlined five goals as part of the administration’s 10-year plan in line with these key policy drivers, namely:

  • The eradication of poverty and inequality, with the aim of not a single person going hungry
  • Economic growth that exceeds population growth
  • Creating two million youth employment opportunities
  • Ensuring that every 10-year old will have the ability to read for meaning
  • Cutting the number of violent crimes by at least 50%

The Why:

The aim of these key initiatives is to level the playing field and create an economic environment where all South Africans can thrive. This will result in an economy that can compete head-on in the global market environment, and that can actively participate in and contribute to global economic growth.

The How:

This, unfortunately, is where the water becomes a bit murky, as the President simply provided broad brushstrokes as to how the aforementioned goals will be achieved, including:

  • Increasing the number of police officers
  • Implementing a broad-based and aggressive reading program to improve literacy
  • Reigniting manufacturing and production by deploying industrial zones and SME incubators
  • Launching an infrastructure fund to reignite infrastructure development and investment that will also revive the construction industry

Most South Africans were hoping for more information on exactly how these initiatives will be implemented, and more importantly how they will be funded. It seems, however, that we will have to deploy some patience, as it would have been impossible for the President to do a deep-dive into each of these initiatives during SONA, and we will just need to trust that government intends to deliver on these promises.

Other contentious issues that need further attention include Eskom, Land Redistribution and the mandate of the South African Reserve Bank (SARB):

Eskom: The most prominent threat to the South African economy

  • The President made it clear that all users of electricity should pay for electricity
  • The survival of Eskom is crucial for the survival of the South African economy and is the responsibility of all South Africans
  • The 9-point turnaround strategy is already in motion and yielding results. This plan includes:
    • Deploying key staff to where they are most needed
    • The reduction of costs
    • Better continuous maintenance
    • Ensuring the continuous supply of coal
  • The funding made available to Eskom during the February budget will only last until October 2019
  • South Africa cannot afford for Eskom to default on its debt obligations and as such, government will move to expedite the allocation of up to R230 billion to the utility to prevent a default and ensure operational sustainability

While the exact nature of the financial assistance, the turnaround strategy and details such as the identity of the new CEO remains unknown, the President indicated that the Ministry of Finance will provide the nation with a comprehensive breakdown in due course.

Land Redistribution: a matter of dignity

  • The sensitivities of the matter are well known to the President.
  • Land redistribution is to be aimed at creating a better functioning economy for all.
  • Government will expedite the release of viable government-owned land for the purposes of residential occupation and farming.
  • Government aims to produce a clear property rights regime.
  • Recommendations will be presented to Parliament in due course.

The SARB - contentiously constitutional:

  • Much to the dismay of his party peers, the President reiterated the independence of the SARB.
  • SARB will continue to operate within the mandate set out in the constitution, with its main focus remaining on currency stability, while incorporating its mandate and monetary policy actions into the greater macro-economic landscape.
  • SARB will continue to act independently, without favour and in a prudent manner that promotes its mandate.

Additional local data released this week includes CPI of 4.5% year-on-year during May, slightly exceeding expectations, but still remaining well below the upper band of the target range. The continuous moderate inflation opens the door for SARB to potentially decrease interest rates in an effort to assist the local economy without jeopardizing price and currency stability.

The rand started the week off in fragile territory, but quickly turned the boat around, as the accumulation of ZAR positive news headlines drove the currency stronger. These headlines included:

  • The dovish Fed, and potential interest rate cuts in the US
  • Moody’s reaffirming their stable outlook on South Africa
  • President Ramaphosa announcing that there is a clear plan for the turn-around of Eskom
  • An ease in trade tensions as the US and China gear up for the G20 Summit.

The rand rapidly gained momentum as markets reopened on Tuesday morning, gaining over 3%, closing Thursday evening at R14.27/$.

SOUTH AFRICAN EQUITY

The South African equity market gained some momentum on Wednesday in line with global equity markets, with the JSE top 40 closing 0.81% higher on Thursday to trade at 52 960.80 points.

The charge was led by:

  • AngloGold Ashanti (+6.2%)
  • Bidvest Group (+2.39%)
  • Discovery Holdings(+1.63%)
  • Aspen Pharmacare Holdings ( +1.17%)

THE WEEK AHEAD

While the rand is currently all the rage, the local unit remains the clear underperformer when comparing to the year-to-date performance of the rand to its peers. With many speculating that the potential of a credit rating downgrade is growing by the day, South Africa remains extremely sensitive to short-selling and the volatile global environment.

The overall picture for South Africa has not changed, with many key policy questions still remaining unanswered. While the SONA address by President Ramaphosa certainly boosted positivity, the looming question of how these objectives will be funded remains a key concern.

With the trade tension dynamic taking a breather, and the dollar remaining under pressure, the opportunities to purchase foreign currency at current levels should be utilized, as the global backdrop remains a slippery slope that could trigger a ZAR sell-off at any point.

On Friday morning, the rand would have set investors back R14.33/$, R16.20/€ and R18.23/£.

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