Philip Roth once said, “Fear tends to manifest itself much more quickly than greed, so volatile markets tend to be on the downside. In up markets, volatility tends to gradually decline.” The novelist’s statement is perhaps more relevant now than ever, as 2020 has been characterised by fear: fear of the COVID-19 virus; fear of sustaining livelihoods; fear of entering recessions and depressions; and fear of what the future holds.
RAPID SHIFTS SEEN IN GLOBAL SENTIMENT
The US remains the largest economy globally, and the dollar’s status as a safe haven asset means that its value is crucial in currency markets, especially when we evaluate risk appetite. Additionally, the copious amounts deployed by the Fed in its efforts to buffer the US economy have played a crucial role in saving emerging markets from falling off a cliff after suffering losses of over 30% earlier this year. As we enter the final quarter of the year, stimulus and (to an even greater extent) sentiment remain the key drivers of financial markets.
As a case in point, sentiment was seen gradually moving out of less negative terrain only a month ago, as global travel gradually reopened and everyday life began to return to some version of normal. However, sentiment rapidly eroded again as COVID-19 cases in both the UK and the EU spiked dramatically. In almost a flip of a switch, risk appetite then vanished, and we were once again reminded of the volatility and risk at play.
Moreover, while central banks and specifically central bank stimulus remain crucial for driving risk sentiment, many other factors are also worth noting which could also play a significant role in markets in the months to come.
Political instability is often associated with emerging markets, but as things stand, is currently rife in the developed world. First, the likelihood of a no-deal Brexit appears to be increasing by the day. Second, the ongoing animosity between the Democrats and Republicans and the race to the Oval Office in the US also seems to be turning into a somewhat volatile situation. The recent debate between current President Donald Trump and Democratic candidate Joe Biden made it all too clear that a smooth US election is not on the cards, and that any election result is likely to stir further controversy.
Next, it seems that Europe’s economic woes are never ending, with most of the bloc’s economies falling back to 2008 or financial crisis levels. In simple terms, the pandemic has eliminated 12 years of growth in less than 6 months. While the President of the European Central Bank, Christine Lagarde, acknowledged that the ECB is weighing up the effects of following an inflation-targeting approach similar to the Federal Reserve, the bloc’s economic recovery will take place at a snail’s pace.
Finally, economic data also needs to be considered when looking at sentiment. Key data for this week included:
- GDP contracted by 31.4% quarter-on-quarter in Q2
- Corporate profits declined by 10.7% quarter-on-quarter in Q2
- Challenger job cuts rose by 2.6% in September
- Initial jobless claims showed modest improvement at 837,000 last week, beating expectations of 850,000
- Consumer confidence declined by 13.9% in September, while industrial sentiment lost 11.1%
- Manufacturing PMI in September met expectations at 53.7 points
- Unemployment remained steady at 8.1%
- GDP contracted by 19.8% quarter-on-quarter during Q2
- Manufacturing PMI declined marginally to 54.1 points in September
- Industrial profit gained 19.1% year-on-year in August
- Manufacturing PMI for September ticked up to 51.5 points, while composite PMI increased to 55.9%
SA FACES SIGNIFICANT ECONOMIC HURDLES
Winter has officially come to an end and lockdown remains at level one in South Africa, but the economic storm is unfortunately still raging as the country expects to see an annual decline in economic growth of between 7% and 8% largely as a result of the pandemic. With October now underway, the key event for the month from a local perspective is now the upcoming Medium-Term Budget Policy Statement (MTBPS).
While the MTBPS is more a policy overview than a budget, it will set the tone for what we can expect during the February 2021 budget, and as things stand the picture is not very bright. While the country is well on its way to operating at full steam again following lockdown, the reality is that we continue to face significant economic hurdles.
With no economic growth, high unemployment and an enormous government debt burden, it is clear that President Ramaphosa, Finance Minister Tito Mboweni and the rest of government face an almost impossible task ahead in restructuring the economy, finding the necessary funding to kickstart growth, and simultaneously financing all of South Africa’s other fiscal obligations. But while the road ahead may be treacherous, it is important to acknowledge that the economic reform plans on the table are rather impressive, and if implemented efficiently, could finally see South Africa achieve an upward growth trajectory.
As part of the emerging market basket, South Africa suffered massive volatility in financial markets throughout 2020, and will continue to do so as investors switch between risk-on and risk-off sentiment driven by global factors. With copious amounts of money in circulation following synchronized stimulus by central banks, and the local interest rate being significantly higher than the developed world, one can understand why the rand rallies every time we see a switch to risk-on. Over the past two weeks, however, the switch between risk-on and risk-off has caused severe volatility in the local currency market, trading between R16.17 and R17.20/$.
That said, it’s been argued many times that the rand’s volatility is not always negative, as it is a function of the efficiency of the local financial market and the fact that the local unit often serves as a proxy for a large portion of emerging markets.
Local PPI increased by 2.4% year-on-year in August, while CPI remained steady at 3.3%.
Unemployment dropped to 23.3% in Q2 from 30.1%, although on closer examination this is by no means a positive outcome. It’s easy to be deceived by a drop in the percentage unemployed, but one needs to consider that the definition of unemployment only includes people between the ages of 16 and 65 actively seeking employment. Taking another look at the job numbers, a decline of 2.2 million jobs seen together with this definition means that jobs were not only eroded during lockdown, but that many people gave up on finding employment altogether.
Uncertainty remains rife as we head towards the US presidential elections, and we can expect the US dollar to remain under pressure – especially with additional stimulus talks underway. A subdued dollar poses yet another opportunity for emerging markets (including the local currency market) to gain some momentum in the short and medium term. Meanwhile, the MTBPS remains a key highlight on the local calendar for October.
From a data and events perspective, we will keep an eye on:
- Local Standard Bank PMI
- EU Markit Composite PMI
- UK Composite PMI
- US Markit Composite PMI
- US JOLTs job openings
- CNY imports and exports
- US FOMC meeting minutes
- BOE meeting minutes
- Caixin services PMI
- Local manufacturing PMI
- ECB policy statement
- UK industrial production
- UK GDP
The rand started the day trading at R16.63/$, R19.50/€ and R21.40/£.