Market commentary

Little significant news made its way to the market this week, and investors are now largely waiting patiently to see how the US elections will play out – and what the outcome may mean for future US policies and trade relations. 

 

U-TURN ON US STIMULUS TALKS

US President Donald Trump was recently diagnosed with COVID-19 – somewhat ironically given that he has persistently downplayed the severity of the coronavirus and resultant pandemic. However, he was back at work a mere three days later to defend his reign of the Oval Office. 

Once back on the horse, Trump caught markets off guard by postponing the stimulus meeting with Congress until after the election, seeing the dollar regain some of lost ground and making a minor dent in the risk appetite that’s been supporting emerging market and other high-yielding assets. Then, in a second Trump U-turn for the week, stimulus talks resumed in Congress, with hopes in the market soaring. That said, Congress is still at loggerheads on the matter, and we may only see a partial stimulus package. With the election now less than a month away, we can be sure to see continuous volatility in the market, and even more political bickering as Trump and Biden fight for the “throne”.  

Turning to the UK, this week saw both British and Irish MP’s express concern about the spread of the coronavirus, while Scotland is opting to shut down bars and restaurants. Recent data from the UK indicates that the contact tracing system deployed in the UK failed to trace as many as 30% of those who came into contact with an infected person, making it almost impossible to effectively identify and quarantine those exposed. While rumours of hard lockdowns are circulating, one cannot dismiss the detrimental effect that another lockdown will have on the already struggling UK economy, as well as its social fabric as residents are increasingly expressing dismay with restrictions and their desire for life to return to normal.

Talks between the UK and the EU remains on the brink of descending into a complete breakdown, but Prime Minister Boris Johnson seems fairly content with the new agreements the UK is entering into with other countries as the UK’s divorce from the EU approaches. The latest of these agreements is with the Ukraine, as Johnson and Ukraine President Volodymyr Zelenskiy commence talks regarding the free trade of goods and services. 

It’s been a rather quiet week on the data front, but the following releases are worth a mention: 

US: 

  • Markit Composite PMI for September was in line with expectations at 54.3 points
  • JOLTs job openings undershot its mark, at 6.49m for August
  • Initial jobless claims remained elevated at 840k for the week 

EU:

  • Markit composite PMI reached 50.4 points in September
  • Retail sales gained 3.7% year-on-year in August

UK:

  • Composite PMI for September came in at 56.5, down from 59.1 in August 

 

SARS REPORTS INCREASING PRESSURE ON TAX REVENUE 

As we approach the crucial Medium-Term Budget Policy Statement, concerns regarding government debt levels, embattled SOE’s, and an ailing economy and a shrinking tax base remain in focus.

This week, South African Revenue Service (SARS) data indicated that South Africa struggled to collect taxes, even before the pandemic hit. With businesses feeling the pinch and households bearing the brunt of job losses, SARS’ ability to collect revenue has diminished yet again. In parliament, SARS commissioner Edward Kieswetter highlighted poor economic conditions, low business confidence and a lack of reliable electricity supply as some of the key contributors for the decline in tax revenue witnessed over the past few years.  

Locally, we also witnessed some worrisome socio-economic developments, as yet another farm murder saw farmers take up arms and storm the courthouse where two suspects were being held, clashing with police. Seizing upon the opportunity for some publicity, the EFF called on ground forces to attend the hearing of the two accused, once again leading to divisions within the nation. 

Meanwhile, three new amendments to level 1 lockdown regulations have been made. In the gazette published on 07 October, additional easing and clarifications were communicated, including: an extension of temporary disability grants and care dependency grants until 31 December; the permission for international sport events between South Africa and nations of low and medium risk to resume; and the limited reopening of events and venues. Cinemas and gym facilities may operate at 50% of each venue’s capacity, while indoor gatherings are limited to 250 people and outdoor gatherings are limited to 500 people. 

Finally, business confidence figures released this week indicated that confidence is on the rise following the substantial drop witnessed in lockdown, although confidence remains depressed at 85.7 points. 

 

LOOKING AHEAD

The rand managed to hold its own this week despite the initial delay on the US fiscal stimulus package, trading between R16.50 and R16.72/$ for the better part of the week. The local currency then gained on the back of renewed hope as investors welcomed the potential for even a partial stimulus package.

We expect to see more of the same in local currency markets as we await some direction from the MTBPS and the US elections. However, amidst ongoing uncertainty and the concerning underlying fundamentals of South Africa, risk appetite could easily erode and see the rand plunge past R17.00/$ in the bat of an eye. 

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

Monday: 

  • Local manufacturing production, gold production and mining production
  • CN FDI

Tuesday:

  • CN imports and exports
  • UK unemployment
  • Local gold and mining production
  • US CPI

Wednesday:

  • Local retail sales

Thursday:

  • CN CPI, PPI, unemployment, retail sales and industrial production
  • US initial jobless claims 

Friday:

  • EU CPI
  • US retail sales and production data 

The rand started the day trading on a slightly better footing at R16.54/$, R19.47/€ and R21.48/£.

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