Ricochet News

Covid-19 and Oil crisis keeps Rand on shaky ground

By James Paynter - Apr 28, 2020
Covid-19 and Oil crisis keeps Rand on shaky ground

A rough week for the Rand and for markets globally ensued, as we saw oil crash to unprecedented levels and the Rand test all time highs again...

As we near the end of April, the reality of SA being delisted from the bond index becomes very real.

But in the big scheme of things - this has become a small talking point compared to the lockdown thanks to Covid-19.

Ramaphosa's new plans to stimulate the economy are welcome...but will they be effective - and enough?

Especially as South Africans itch to get back to work...

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

 

Key Moments (Apr 20-24 2020)

 

To start with, here are the major headlines from the last week:

  • Oil turns negative- after a major collapse over the last few months, things turned from bad to worse for oil, as we saw a total capitulation of the market into negative figures
  • Ramaphosa's R500bn plan - a more than 10% of GDP stimulus package is what has been proposed...will it be enough? And will it be used rightly?
  • Bond delisting nears - bond outflows have continued to speed up as the deadline for SA's junk status delisting nears...what will the effects be?
  • US reopen plans take shape- the most critical country to the global economy restarting is the US, and it seems to be that we are slowly heading toward normality...in some form at least

A jittery Rand began the week around R18.75, having endured a torrid previous 5 days.

More pain was likely on the horizon according to our forecast, which expected an extension of the weakening up toward R19 and above...

And Monday was when the oil crisis unfolded - a quite stunning turn of events saw the market crash to -$37 a barrel (yes, that's a negative sign!)

(we will go into this in more detail in our upcoming newsletter - stay tuned...
...all I can give is a sneak peak: some qualitycontent coming your way soon in our latest offering to stay on top of the global crisis)

In essence, the demand for oil has dropped to a critically low level, which saw the market collapse on the final day for locking in May's futures - as no one wanted a delivery of oil.

This is the lowest we have ever seen Oil drop - and a sign of the seriousness of a global lockdown. It is nothing like a war in which demand continues - the stopping of travel and business has totally changed the global outlook for so many markets. This shift will continue to have a major hit on the energy industry, especially the US, Russia and Saudi Arabia.

But the Elliott Wave Principle obviously had its own take on oil, and where we are going, which is what we will cover in our newsletter.

In SA, Ramaphosa released plans throughout the week on how the new R500bn stimulus package would work to kick start the South African economy, as well as how the exit from lockdown would work.

As expected, this would be a phased approach - one step at a time, slowly reducing restrictions as time goes on, starting May 1st...

...this was some hope for business, but not the complete end of lockdown like everyone desires.

As for the stimulus package:

  • However necessary, it is sadly only more debt for SA
  • Only R130bn will come from the current budget with the rest being borrowed
  • Much of this is borrowed money from the IMF and World Bank, who are very reputable lenders, meaning not all hope is lost with SA being downgraded to #JunkStatus
  • The total package size is a whopping 10% of GDP!

And here are some of the sectors it will be spread across:

  • R20 billion to fight the pandemic.
  • R20 billion for emergency water supply, sanitisation of public transport and facilities, and providing food and shelter for the homeless.
  • A six-month temporary Covid-19 grant of R50 billion.
  • R100 billion for protection of jobs and to create jobs.
  • R40 billion for income support for workers whose employers can’t pay wages.
  • R200 billion loan guarantee scheme to help businesses pay salaries, rents and suppliers.

The effects of the package will remain to be seen - and we maintain the view that however necessary these stimulus packages are, they are only adding to the problem, not solving it. Credit is the issue - not the solution!

Briefly we saw the Rand test R18.70 midweek, but that did not last for long...

 

 

And then in other news

  • The latest US unemployment figures came in, and as per our predictions, we saw the final nail in the coffin for more than 10 years of job gains being wiped out. A further 4.4 million claims took the total to over 26 million unemployment claims in just 5 weeks. This is catastrophic for the US - likely pushing unemployment towards the worst levels seen in the Great Depression - with more still likely to come.

    This is government enforced, so it has been artificially driven, but how many business will re-open and take on the same level of staff, and those layoffs will continue?
  • And along with that came a number of US states rushing toward reopening - more in desperation rather than anything else, in an attempt to try and stem the flow of unemployment claims before more damage was done to the economy. This is a risky strategy, as a second wave of infections resulting in a second lockdown could be catastrophic. It remains to be seen as to whether this is the right or wrong option.
  • Locally, SA's bond delisting is coinciding with the end of Stage 5 lockdown, where finally there will be some respite for businesses from the beginning of May. But flying slightly under the Radar is that #junkstatus only takes effect at the end of May, thanks to a short extension. The outflows from the bond market has been significant already, and it will become increasingly difficult for South Africa's government to finance their increasing pile of debt.
  • This debt is added to with Eskom likely to bleed around R2.5bn a month in revenue because of reduced demand in electricity - thanks to the lockdown. On a brighter note for business, it appears that pickup in China’s economic activity is now starting to be seen.

The latter half of the week saw the Rand test R19.20/$ again, before falling back to close at South Africa's end of day down around R19 to the Dollar...

Another tough week for the markets - and the pressure set to continue until the global lockdown slowly releases its clutches on economies...

And that was the wrap!

 

The Week Ahead (27 Apr - 1 May 2020)

 

Before looking into this week ahead, if you have not already, please start with viewing the replay of our webinar:

"The Global Crisis Has Begun - Where Are We Heading?"

It is free to access by clicking the link above which will take you to the YouTube replay.

We found the information we presented essential to plan for the future...

...and so did hundreds of our clients.

If you find it of the same value, please share it with your colleagues, family and friends.

As we look into the week, we have a slew of fundamental and economic releases and events that can provide provider triggers, with some of the main ones being:

  • SA Inflation rate
  • Countdown to SA Bond delisting on Thursday
  • ECB & US Interest Rate Decisions
  • US, EU, Germany and Italy Unemployment numbers
  • SA Balance of Trade

In essence, expect a similar trend to the prior weeks...more figures to shock everyone.

What we will be seeing in economic reports is the enormous damage that COVID-19 lockdown has already done weeks ago already. And with damage still being done as we speak, there is clearly more to come.

But as for the Rand, we will continue to focus on what the patterns are telling us to give an objective view of direction...

 

To get a look at what charts we are looking at and using to give direction, use the link below to get access to the latest forecast. No charge. All yours for 14 days.

Click here to get 14 Day Trial on the house!

 

Looking forward to your feedback.

To your success~

James Paynter

 

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