Market commentary

Earlier this year, financial markets fell into chaos as Covid-19 fears took hold, sparking a rapid sell-off in risk-based assets. Since then, global attention has remained largely focussed on the pandemic, with other factors – such as geopolitics – falling by the wayside. As we head into the second half of the year, there is little sustainable momentum in either direction, with rapid switches between risk-on and risk-off causing a sense of market whiplash.

 

ANOTHER RISK-ON RALLY SUPPORTS RAND

The world seems to have made peace with rising global Covid-19 numbers, and while numerous countries are imposing limited restrictions yet again, renewed hard lockdowns seem to be off the table for the time being. The attention in financial markets is thus shifting away from the number of infections and subsequent mortality rates, and turning instead towards the resumption of economic activity on a global scale. Policymakers, both from a political and monetary standpoint, are gradually being brought back into focus to serve as guides for economic recovery expectations, and the steps that may be required to revitalize economies as quickly as possible.

Despite lingering uncertainty, economic activity is beginning to regain momentum. And in an environment characterized by slow growth and the worst economic contractions seen since the Great Depression, any glimmer of hope is enough to send markets into a risk-on frenzy. Improved economic data from both the EU and the US towards the end of this week hence caused safe haven assets such as the greenback and gold to come under pressure, while emerging market assets (offering higher risk/return ratios) clawed back some ground. However, markets have struggled to maintain sustained direction either way over the past few weeks, and any uncertainty or bit of politicking could see the market suddenly U-turn again, completely disregarding all sense of reason.

Turning to politics, and more specifically the US presidential campaign, it is safe to say that the race to the ballots is providing copious amounts of news and entertainment fodder. Notably, President Trump once again made headlines this week for allegedly acting less than courteously in interactions with foreign leaders, and for exhibiting a sense of favouritism towards authoritarian-type leaders.

Additionally, a new study released this week found that American billionaires are now spending 20 times more on political contributions, than they did 20 years ago, amounting to a staggering $611 million in 2018 alone. It’s never been a secret that business and politics often go hand in hand, but while some see this as essential for sustained economic performance, others have condemned the blurring of lines, calling for a more equal society.

Meanwhile, UK Prime Minister Boris Johnson also remains in the firing line amidst accusations that he is acting with impunity, and is intentionally misleading British citizens to drive his political agenda in terms of a no-deal Brexit.

With focus shifting to economic activity and the rebuilding of livelihoods post-lockdown, economic data is redrawing attention, acting as a key contributor towards the back and forth behaviour of markets in terms of risk appetite. Some of the key market-moving releases this week included:

US:

  • Manufacturing PMI for June met expectations, improving to 49.8 points, but marginally missing the critical 50-point mark
  • Non-farm payrolls for June exceeded expectations, reaching 4.8million
  • Initial jobless claims missed the mark, but still improved from previous numbers to 1.427 million
  • Unemployment improved from 13.3% to 11.1% in June

CN:

  • Industrial profit accelerated by 6% year-on-year in May
  • Manufacturing and non-manufacturing PMI improved to 50.9 and 54.4 points respectively in June
  • Caixin Manufacturing PMI for June also improved, reaching 51.2 points in June

EU:

  • While business climate, consumer confidence and industrial sentiment all remained negative, a move in the right direction was witnessed across the board in June
  • CPI ticked up marginally year-on-year to 0.3% in June
  • Manufacturing PMI improved significantly to 47.4 points
  • Unemployment remained flat at 7.4%

UK:

  • GDP contracted 1.7% year-on-year during Q1 2020
  • Manufacturing PMI rose to 50.1 in June, up from 40.7 in May

 

SA HIT BY GROWING COVID-19 INFECTIONS AND POOR ECONOMIC DATA

Locally, South Africans are slowly regaining a sense of normality, as more children return to school, and we can visit our favourite corner bakeries for those freshly made pastries and coffee. Traffic on the major routes across the country is also returning, with traffic reaching levels close to pre-lockdown as activity in most sectors resumes at almost full capacity.

But like the rest of the world, South Africa is not immune to a continued increase in the number of infections, as cases across the country are rapidly rising, and hospitals are starting to feel the full effects of the health implications. The increase in infections was expected in line with the reopening of the economy and increased interactions between people, and will unfortunately remain a reality for the foreseeable future, or until such a time that a viable vaccine is developed and deployed globally.

Travel and tourism have been among the sectors hardest hit by the country’s lockdown and poor economic growth prospects. Strict restrictions on both domestic and international  travel remain in place as Level 3 continues, and many South Africans are anxiously awaiting a review of the lockdown level, while others speculate that the country could even take a step backwards as a result of the increase in infections. Unfortunately, the fate of the local tourism industry – which contributes close to 3% of local GDP and accounts for approximately 1.5 million jobs – hangs in the balance, as South Africa remains one of the few countries with strict travel restrictions.

This week finally saw the release of the much-anticipated GDP figures for Q1 2020. The data indicated that the South African economy contracted for the third consecutive quarter, shedding 2% quarter-on-quarter, and painted a rather dire picture of what 2020 has in store for the local economy. South Africa entered lockdown in an already economically dysfunctional state, and will carry the effects of the lockdown for years to come, as government is now grappling to fund the budget deficit while the private sector lacks the confidence in the local economy to actively invest and expand.

Other data, such as private sector credit, underscored this lack of confidence, helping to explain the decrease of over 20% in fixed capital formation – or investment into plants, property and equipment that accompanies the expansion of business activity. The local trade balance turned positive in May as a result of import restrictions and the closure of borders during lockdown. All was not doom and gloom, however, as manufacturing PMI rose to 53.9 points, marking the fastest expansion in the local manufacturing sector since August 2013.

The rand gained momentum towards the end of the week as positive global data overshadowed the dire local outlook, seeing investors flock towards higher yielding risk-based assets. The rand managed to break below R17.00 yet again on Thursday, posing renewed short-term opportunities for purchasers of foreign currency.

 

LOOKING AHEAD

We expect the theme to remain static in the coming week, with investors seeking confirmation of a recovering economy by turning to economic data. Markets will also keep a close eye on governments as they impose and renew restrictions in an attempt to slow down the rapid rise in infections.

Locally, we will also look to government for some additional insight with regards to potentially relaxing restrictions on health and fitness facilities and travel, which are two of the hardest-hit industries at this stage of the fight against the virus.

Continued positive data could assist the local currency to gain some momentum in the short term, with the rand potentially setting its sights on R16.70 and lower should risk appetite remain intact.

Data for the week ahead includes:

Monday:

  • US ISM non-manufacturing orders

Tuesday:

  • UK labour productivity
  • US JOLTs job openings

Wednesday:

  • UK BOE MPC Treasury Committee hearings

Thursday:

  • CN PPI and CPI
  • Local gold, mining and manufacturing production
  • US initial jobless claims

Friday:

  • US PPI

The rand started the day trading at R16.97/$, R19.08/€ and R21.15/£.

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