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Market Update: Eventful week sees rand firm and JSE trend lower

PUBLISHED: Fri, 23 Feb 2018 11:42:20 GMT

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Bianca Botes | Peregrine Treasury Solutions

It was an eventful week in local markets with the State of the Nation Address (SONA) taking place in Parliament on 16 February 2018 followed by the highly-anticipated National Budget Speech, presented by embattled Finance Minister Malusi Gigaba on 21 February. South Africa impressed ratings agencies with the Budget Speech on Wednesday, with all three agencies stating that they are satisfied and optimistic following the presentation.

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The rand started the week off on a strong footing, trading around R11.60 before retreating slightly to R11.75 on Tuesday as the US dollar gained momentum. However, the greenback’s momentum, coupled with the underperformance of emerging markets, could not hold the rand down as Gigaba announced a rise in VAT from 14% to 15%, a move many deem “risky” for the governing party in light of the upcoming 2019 national elections. That said, this move indicates government’s commitment to making hard choices to ensure a strong economy that, in time, will benefit all.

A couple of weeks ago the market largely anticipated a downgrade by Moody’s, given a political landscape that seemed to be dire under the rule of erstwhile president Jacob Zuma. However, since then key political events, including a new head of state in President Cyril Ramaphosa and a market-positive SONA and Budget, has certainly turned the tables. For now a downgrade is being almost completely discounted. The current political environment, coupled with a rise in commodity prices, has created a rand strength bias in the short to medium term.

A word of caution however: We are still in a global market in which the United States Federal Reserve (Fed) is largely anticipated to increase interest rates, and a local environment where there is high unemployment and sluggish economic growth. Therefore, a correction in the rand can be expected. The range for the week ahead is between R11.60 and R11.80, with a longer-term view of a break above R12.10.

Local consumer price inflation figures, which were released on Wednesday, showed a decline of inflation to the lowest levels since September 2015, coming in at 4.6%. However, the South African Reserve Bank is expected to keep interest rates on hold for the time being, with a Reuters poll indicating that the next potential cut is only expected in November.

The stronger US dollar damped most commodity prices over the week, with oil dipping back down to the US$60 mark over concerns around supply stockpiles, while gold fell by 0.1%. A hawkish Fed is expected to add some pressure to commodity and equity markets, and volatility is largely expected.

In equities, the JSE tracked the global market down most of the week, briefly turning the tide to close up on Wednesday afternoon. Following the Budget Speech the All-Share Index saw a rise of 1.17% while the Top 40 clawed its way higher by 1.39%, with the biggest movement taking place among financial institutions. The expected monetary tightening by the Fed put a damper on international equity markets, pushing the S&P500 to fall by 0.2% while the FTSE Index gave up 1%.


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