Ricochet News

Moody's & Fitch derail the Rand-train to R19...

By James Paynter - Apr 6, 2020
Moody's & Fitch derail the Rand-train to R19...

The crazy weeks continue to roll on by with the Covid-19 pandemic continuing to completely change life as we know it.

As for markets, they have been as volatile as ever, with the Rand breaking to all time weak levels again against the Dollar and Euro.

The reality of the virus' effect across the world is starting to show now, as it is no longer a case of just "fearing the worst" but actually seeing it develop right before our eyes.

US Jobless claims exploded to record levels, adding to the panic in the markets.

South Africa on the other hand, had all of this to deal with, along with the aftermath of the Moody's downgrade to junk status.

There is a whole lot to cover, so let's get into the full review.…

(plus we give you some great news for this week ahead...

...read on to the end to see what we have to offer)

 

Key Moments (Mar 23-27 2020)

 

Here were some of the biggest talking points from the last 5 days:

  • Moody's and Fitch fallout- what does the future hold for South Africa as having been put into 'junk' status - and further?
  • COVID-19 crosses 1 million cases - the exponential curve continues to grow, crossing more than 1 million on Thursday...how much longer will it continue to speed up, as it is confirmed that China diddled their figures?
  • US Jobless claims- 3.6 million the week before, 6.6 million this last week - what next for America & the world's unemployment?
  • Stimulus packages - the only answer that governments know to these problems, and one that only ultimately ends in more trouble, were being issued at a rapid pace

Another week of volatility kicked on right from the start, as we saw the market digest the Moody's decision late on Friday after the markets had closed.

Immediately the USDZAR spiked all of 30c in the first minute of trade, hitting over R18 in a few hours!

But after that, we saw some stability come into the markets as we traded around R17.80 through to Wednesday...

However, we need to take look at the overall Moody's / Junk Status situation, because it is of much importance going beyond just 2020.

In short, these are the effects:

  • Borrowing costs and government bond yields to rise.
  • Global fund managers who have investment-grade mandates will be forced to sell-off their South African bonds by the end of April (approx. USD11 billion), which has Finance Minister Tito Mboweni “trembling in his boots”.
  • Mboweni said he would be creating a new unit within the Ministry of Finance to work on structural reform.
  • The downgrade will result in the removal of South Africa from the World Government Bond Index (WGBI). It is a requirement of the WGBI to be rated investment grade by at least one of the three rating agencies and South Africa was downgraded by S&P and Fitch in 2017.
  • And this is with the current situation of the expected contraction of the local economy by 2.5% in 2020 and debt to GDP rising to 91% in 2023.

But what does that mean for the Rand?

Well, it is certainly Rand-negative. But with the markets, there is always more than meets the eye.

So, we did some digging and took a look at other countries who had been cut to junk by Moodys, as being their final nail the coffin from the 3 major agencies (Fitch, S&P being the other two). Two of our findings were Brazil and Russia.

What we see in both of these cases is very interesting, because what happened in the months after was NOT what anyone would have expected:

Russia

 

 

Brazil

 

 

Perhaps a case of "buy the rumour, sell the fact"?

Perhaps it was priced in already?

Who knows...but don't be caught in the emotion of Moodys decision and think it will end in an automatic collapse of the Rand. We have to look at the actual facts of the wave count. But the reality of outflows of cash are real, as Fin24 detailed different groups expectations.

As things went however, the week was a torrid time...

As lockdown continued, and news broke in the US over the vast economic effect of the virus, we saw the Rand crash weaker and weaker against the Dollar, breaching R19.00 against the Dollar on Friday...

We have certainly seen a first 3 months of the year like no other:

 

 

And then in other news:

  • The Coronavirus pandemic continued to cause havoc far and wide, as we topped more than 1 million cases worldwide - and that figure is definitely not accurate, as US Intelligence confirmed that China had concealed extent of the virus outbreak, which we all knew already. Locally, warnings are that Africa as a whole could be at least 2 weeks away from the height of the virus storm...will the lockdown be enough to stop this from being the case in SA, is the question? SA may even be approaching the IMF over this, as funding for fighting the virus is an issue.
  • But these issues are certainly not just local, as we saw jobless claims for the US climb another THREE MILLION in just one week! From 3.6mil reported the previous week to 6.6mil this last week…staggering, when you compare this with just 665k during the Great Recession of 2007-2009. While this is artificially driven by forced business closure by government, nevertheless this is an alarming number, and gives some idea of the seriousness of the situation:

 

 

  • The only answer from governments around the world has been to throw huge stiumulus (read cash on credit) at the situation...but more credit is not the answer, credit is in fact the problem. The stimulus packages are excellent to try and prop the economy up, but at the end of the day, someone has to foot the bill for this! It is just adding to an already huge problem. The US has only just passed one bill, and they are already looking at many more options of future stimulus bills!
  • In other economic activity, SA's February trade surplus of R14.15b was a nice surprise compared to Jan's deficit of R2.72b. And a glimmer of hope from China economic activity, with Chinese manufacturing PMI proving better than expected.

On Friday, we saw the US Non-Farm Payrolls come in at negative 700,000 (expected was a negative 100,000) and a jump in the (official) unemployment rate from 3.5% to 4.4% - a level last seen in August 2017. You can be sure there is worse news to come on this front as to how serious the actual situation is!

The Rand traded up more than 60c despite this news, following Fitch downgrading SA even deeper into junk as citing the ballooning government debt as the main issue.

And just like that, the Rand traded as high as R19.08/$...

It has been a torrid week, and right now, fear was nearing a peak that the Rand would never come back down.

 

The Week Ahead (6-10 Apr 2020)

 

There is so much more to cover, and yet so little time...

So, for the second week in a row, we are going to be doing a webinar for our clients to cover all that is happening in the global situation right now. This is at short notice, so we still have a whole lot to prepare…! :)

We want to cover what YOU want to know.

So I am depending on your input as to the content of the webinar.

Some of the points we will cover though:

  • Currencies - what next after a crazy few months for the global currencies?
  • Stock Markets - are we going to see a further collapse or a recovery?
  • Stimulus Packages- will they save the global economy or worsen the situation?
  • Gold- is it a safe haven to be trusted in times of financial crisis?
  • Cryptocurrencies - where does Bitcoin and other cryptos fit in?
  • Rand- what are we expecting for the Rand over the next few months and years?

And much more...

...but YOU get to shape the content.

So please send your questions in, and I will do my best to answer them.

The invite will be coming across to your inbox next week. This will be a 100% free webinar, so please share the link far and wide when I send it over. I want as many persons as possible to get the benefit from this.

The Webinar will be Thursday, 9th of April at 7pm South African time (6pm UK time and 5pm GMT).

Looking forward to your feedback.

Regards,

James

 

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