Market commentary

Technology has rapidly advanced over the past few years, and governments are now busy structuring policies around the fourth industrial revolution, trying to keep pace with the rapidly changing digital world. Yet despite all our technological progress, we still find ourselves at the mercy of nature. As a case in point, this year’s coronavirus pandemic wiped out years of economic growth within the space of a few months, and even as the UK and Europe grapples with a second wave, we have yet to find a cure. But while it may sometimes seem as though our progress as a species is nothing more than an illusion, it is only through a combination of technological developments and human resilience that we advance over time.

 

THE RACE FOR A VACCINE CONTINUES

This year’s COVID-19 outbreak sparked the race for a vaccine that will save lives, protect against the threat of further lockdowns and help economies begin running at full steam again. But as history has taught us, there is usually no progress without setbacks. Just this week, Johnson & Johnson had to suspend human trials as one of its test subjects fell sick with an unidentified illness, which was not only a disappointment to the company but also the world.

However, China seems quite optimistic over its chances of producing a vaccine. Chinese health officials are adamant that a viable vaccine will even be available by the end of the year, as four separate trials of possible vaccines are already underway. That said, reports emerged that Chinese pharmaceutical company SinoPharm has already been distributing an unproven vaccine to students looking to travel abroad, raising concerns about the pace at which China is moving in terms of the vaccine, and the potential harm that these vaccines could cause.

Continuing on the subject of progress, the idea of central banks issuing their own versions of digital currency has been around since crypto assets such as Bitcoin made their way to market, with the promise of decentralised banking systems, fewer delays and lower costs. On 09 October, the Bank of International Settlements, together with seven other central banks, laid the foundation for monetary authorities looking to design and implement a Central Bank Digital Currency (CBDC). Some of the key principles highlighted by the framework include:

  • Any form of money supplied by the central bank should not intervene with broader policy objectives.
  • The CBDC needs to exist alongside other systems such as settlement accounts and cash.
  • The deployment of CBDC needs to promote innovation and efficiency.

The framework also provides additional guidelines such as the key features of CBDC, and how the design process should be approached. While we are still a long way from replacing our current monetary systems with digital currency and blockchains, we are certainly making progress in the move towards more efficient banking and payment mechanisms.

From an economic and political point of view, the week brought more of the same, with Donald Trump falling behind Joe Biden in the polls for the race to the Oval Office. The election is now a mere 18 days away, but judging from what we know about President Trump, he likely has a few more aces up his sleeve. And while the thought of a Biden win may bring some joy to anti-Trump individuals, it would be wise to remember that polls are not always as trustworthy as one might think. In 2016, the polls firmly indicated that the US would have its first female president – which Donald Trump is clearly not.

Fiscal stimulus also remains a contentious matter in the US, as Congress is yet to reach an agreement on the COVID-19 relief package that could assist many Americans regain some financial stability following the eradication of profits, jobs and livelihoods. The market seems to be on a seesaw ride, as investors flip between optimism and pessimism that an agreement could soon be reached, sending the dollar and its crosses on something of a rollercoaster ride.

Looking at data released over the past week:

US:

  • CPI remained steady at 1.4% year-on-year in September, while PPI rose 0.4% year-on-year in September
  • Initial jobless claims ticked up to 898k for the week

EU:

  • Industrial production contracted by 7.2% year-on-year in August

UK:

  • Unemployment rose to 4.5% in August, up from the previous 4.1%

CN:

  • Exports rose 9.9% year-on-year in September, while imports climbed 13.2%
  • CPI met expectations at 1.7% year-on-year in September, while PPI shed 2.1%

 

RAMAPHOSA UNVEILS SA ECONOMIC RECOVERY PLAN

It’s not only the developed world that is focussing on the fourth industrial revolution. In South Africa, the term is frequently raised in talks about the future – both in private and public sector. However, with South Africa facing dire economic circumstances and a government that is on the verge of a debt crisis, government needs to focus its attention not only on ensuring that South Africa stays on track with the technological advancements, but also on fixing the country’s deep-seated structural economic problems.

On Thursday, President Ramaphosa offered details on the economic recovery plan that is aimed at turning the South African economy around, shortly after Parliament extended the state of disaster by another month in an effort to avoid a second wave of infections. As part of his address to Parliament, President Ramaphosa announced that COVID-19 grants will be extended yet again until the end of December, in order to assist those most vulnerable to impact of the virus.

The three key aspects of the economic recovery plan include:

  • A massive rollout of infrastructure across the country, focussing on social infrastructure such as schools, water and sanitation and housing;
  • The expansion of South Africa’s electricity generation capacity through accelerating the implementation of the Integrated Resource Plan; and
  • The introduction of an employment stimulus scheme aimed at providing large scale job interventions to secure the livelihoods of the nation.

This plan aims to boost economic growth to 3% over the next decade. But it is now up to Finance Minister Mboweni to align the finite resources available with the economic plan when he presents the Medium-Term Budget Policy Statement (MTBPS) on 28 October.

Local economic data released this week included manufacturing production, which rose 3.6% month-on-month in August, while gold production declined 14.8% year-on-year in August. Mining production also contracted, shedding 3.3% in August. Retailers continue to bear the brunt of constrained consumers, as retail sales contracted 5.2% year-on-year in August.

 

LOOKING AHEAD

It’s been a fairly uneventful week in the local currency market, as the rand traded in a tight range of R16.40 - R16.58/$ for the majority of the week. On Thursday, however, the rand came under a bit of pressure, shedding 1% during local trade as the fading prospect of US stimulus dampened risk appetite.

In the week ahead, we will continue to follow the US election race closely, as a win by Biden is largely expected to be dollar positive – which could see the rand face renewed pressure.

From a data and events perspective, we will keep an eye on:

Monday:

  • CN unemployment, GDP, retail sales and industrial production

Tuesday:

  • CN PBoC loan prime rate decision

Wednesday:

  • UK CPI and PPI

Thursday:

  • UK retail sales
  • EU consumer confidence
  • US initial jobless claims

Friday:

  • EU Markit Composite PMI
  • UK services and manufacturing PMI
  • US Markit Composite PMI

The rand started the day trading at R16.66/$, R19.49/€ and R21.48/£.

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