Market commentary

When it comes to building and maintaining robust economies, we’re often led to believe that money is king. This means that as we face the pandemic, central banks, governments and organisations have all been doing their part to pour money into the global economy in an attempt to muster the best possible response, and hopefully achieve a rapid turnaround in economic growth.

So, with no shortage of cheap money in circulation, many then expected a rapid post-pandemic recovery, especially as initial post-lockdown data indicated a strong rebound in economic activity. However, as a second wave of infections sweeps across the US and the EU, the assumption that money is king seems to have unravelled, as people and businesses – the most crucial elements for economic performance – lack the confidence to spend. And when businesses and consumers are unwilling or too fearful to invest and spend, the amount of money available becomes largely irrelevant.

 

DIMINISHED SENTIMENT SEES DOLLAR LOSE GROUND

Notably, confidence and sentiment numbers released this week saw the US consumer confidence index tumbling to 92.6 in July from 98.3, while the EU consumer survey also indicated a drop well below the long-term average. The lack of confidence seen globally comes as no surprise, however, as unemployment numbers are skyrocketing while businesses battle for survival. Additionally, the future remains largely uncertain, as the virus continues to re-emerge.

Amidst diminished sentiment, the global landscape poses little reassurance. The Democrats and Republicans were once again at loggerheads this week, as the two parties failed to agree on additional government packages for alleviating the ongoing turmoil being sown by the virus in the US. Additionally, US-China trade tensions threaten to take a militaristic turn.

Concerns over the state of the US economy, and its subsequent impact on the global economy, then saw the US dollar lose some of its status as a safe haven asset this week as investors become increasingly cautious of betting too big on the world’s largest economy. Instead, many investors have opted for the obvious alternative – gold.

Looking at the calendar events of the past week:

US:

  • Durable goods orders improved by 7.3% month-on-month in June
  • The Federal Reserve maintained its dovish outlook, but gave little detail in terms of potential additional stimulus. Interest rates were kept on hold. 
  • Continuing jobless claims disappointed markets, increasing to just over 17 million yet again.
  • GDP contracted by 32.9% year-on-year in Q2 2020. 

CN: 

  • Industrial profit accelerated by 11.5% year-on-year in June, while YTD profits declined by 12.8% in the same period. 

EU:

  • Unemployment ticked up marginally from 7.7% to 7.8% in June

 

SA ECONOMY IN STORMY WATERS

The IMF approved emergency financial funding for South Africa on Monday to assist in the fight against COVID-19. South Africa is not unique in seeking funding from the IMF, as the IMF now has active loans in place with over 70 countries worldwide. However, the terms of the funding provided to South Africa was largely free of the standard conditions or strictures that many expected, including certain key metrics for ensuring the ability to repay the loans, and the sustainability of the economy.

As South Africa approaches what is hoped to be the peak of the virus in the country, we remain at lockdown level 3, with many restrictions still weighing heavily on many industries, businesses and households. But Thursday’s news that the curfew will be shifted back an hour from 9pm to 10pm, and the lifting of the ban on intra-provincial leisure travel, will bring some small relief to the millions affected by lockdown measures.

While the rand managed to claw back some significant ground over the past week, it is important to remember that this is by no means the result of rand strength so much as dollar weakness. The South African economy remains in stormy waters, as many businesses continue to shut their doors, and some industries remain completely closed. Moody’s also issued a warning that South Africa is unlikely to be able to stabilise its fiscal debt by 2023, especially given the renewed weak medium-term economic outlook.

Local CPI accelerated by 2.2% year-on-year in June, while PPI undershot expectations, coming in at 0.5% for the same period.

The local currency remained largely within the broader range of R16.35/$ to R16.80/$ during the week, as the US Federal Reserve statement on Wednesday evening left markets wondering about potential future stimulus, and subsequent derisking claimed its pound of flesh on Thursday.

 

LOOKING AHEAD

We will keep a close eye on the unfolding political situation in the US, as President Trump calls for elections to be postponed amidst the pandemic, and geopolitical tensions between the US and China continue to pique market interest.

From a currency perspective, the rand is now trading at the upper end of the broader range, setting its sights on breaching R16.80/$. The dollar’s performance will continue to drive the performance of the local unit in the shorter-term.

Today will also see various key data releases including EU GDP, local trade balance numbers and US wages and income figures.

Key events on the agenda for next week includes:

Monday: 

  • CN Caixin manufacturing PMI
  • EU manufacturing PMI
  • UK manufacturing PMI
  • Local manufacturing PMI and total vehicle sales 
  •  US manufacturing PMI

Tuesday: 

  • EU PPI
  • US factory orders

Wednesday: 

  • CN Caixin Services PMI
  • Local Standard Bank PMI
  • EU services PMI and retail sales
  • US trade balance and services PMI

Thursday

  • BOE interest rate decision
  • US Challenger job cuts, non-farm payrolls and unemployment 
  • CN imports, exports and trade balance.

The rand started the day trading at R16.72/$, R19.88/€ and R21.95/£.

CTA

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