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RMB – a division of FirstRand Bank Limited, is an Authorised Financial Services and Credit Provider NCRCP20.
Copyright © RMB 2026. All rights reserved.
Global: Aggressive pullback after markets run too far, too fast
SA: Poor mining and manufacturing data echo damaging covid-19 effects
Rand: Clawing back to USD/ZAR17.10 as risk-off bites
Local rates: SAGB yields take cue from offshore developments
Source: WHO, NICD
Icy, unwelcoming and bitterly cold. A personification of Johannesburg this morning, and global markets it seems, as Old Man Winter makes his way through both. As the icicles blanket the browning grass, South Africans brace for the weekend freeze. Investors, by the same token, are donning extra padding to shield themselves from the chilly winds of concern over a second wave of infections as major centres in the US report a surge in new cases.
My weather metaphor is perhaps overdone, but neither the further 6% drop in the S&P 500 index, its worst daily performance in 12 weeks, nor the flight to US dollar safety overnight is easily overlooked. India poses a similar risk to Asian markets, with its rate of transmissions outpacing that of the US. Covid-19 fears aside, the aggressive pullback is probably a knee-jerk response to a market that has run too far, too fast, resulting in bloated equity valuations despite there being little change in fundamental determinants. Indeed, the 14-day relative strength index on the S&P 500 warned that the benchmark was in overbought territory well before yesterday’s sell-off, prompting firm profit-taking.
Markets are warming as the day progresses, as some semblance of normality returns to global bourses, with S&P futures up over 1%. The 0.34% recoil in the MSCI measure of EM FX performance aligns to the sudden jump in the VIX, reflecting the distaste for risk assets. Having surrendered almost 60c against the US dollar since the start of the week, the spot rand is clinging to 17.10 after peaking at an early morning high of 17.29.
As is common to the rand, hard-fought gains are easily lost during intermittent bouts of risk aversion. Calmer heads will need to prevail for USD/ZAR to journey back to 16.80. Despite the recent price action, the options market is not discounting a prolonged period of rand weakness. The three-month USD/ZAR risk reversal (which is the ratio of calls over puts) continues to trade steadily at a pre-covid level of 2.78 relative to the 6.03 priced at the height of the pandemonium in March. The underlying threat to the EM complex remains the tenuous relationship between the US and China, which starved the market of risk-taking opportunities last year. If China begins to retaliate against Washington’s limiting of financial ties, it could have a meaningful impact on US banks, possibly setting off another series of inept Trump twitter retorts.
The media is suddenly awash with non-covid headlines, relating to existing albeit overshadowed issues that are returning to the fore to complicate an already complex situation. Britain remains embroiled in what some might call a bitter and banal Brexit battle, introducing a temporary light-touch customs regime at its border with the EU next year. Pressures for the French president to call a snap election are mounting, though Macron is standing firm despite his party falling out of favour in key cities. Geopolitical tensions remain palpable as the US seeks to renew a UN arms embargo on Iran that is set to expire this year, though Russia and China oppose it.
SA’s news headlines are as diverse. Having deferred the approval of suggestions made to the National Command Council until a full health assessment report is received, the cabinet could announce further amendments to its risk-adjusted strategy later next week. The full liberalisation of the economy, ahead of the anticipated August peak in covid-19 cases, demands a higher degree of vigilance, which might not be affordable for certain sectors of the economy. The risk of transmission in public settings threatens to derail the municipal elections which are required to be held between August and November, adding to parliament’s growing pressures.
Perhaps something to be debated over a cup of steaming hot chocolate.
An overall risk-off tone took hold of markets yesterday, resulting in the rand losing most of its recent gains, moving above 17 again. Bonds held their ground quite well, however, with R186s closing mostly unchanged from the open. This is due to the recent disconnect we've seen between the currency and SAGBs. SAGBs are a good indicator of local risk, while the currency reacts as a global risk sentiment indicator. This past week, the rand has had an incredible rally while the bonds traded poorly, so when we saw a reversal of the rand's rally, SAGBs remained stable. Both local and foreign clients were reported as net buyers yesterday.
With no major data releases out, SAGBs should take their cue from offshore developments today. Expect bonds to trade in a narrow range with a slight weakening bias as investors make space for yet another 6.1 yards of paper in a short week next week.
On the inflation front, we have I2025s, I2038s and I2046s on offer today. Secondary market activity has been constructive, but it's been a quiet week in general. The auction sizes are starting to weigh on the market, however, so we could see yields clear at if not slightly higher than market mids.
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