Optimism abounds

 Global: Markets trade positively as many countries plan to ease lockdown over coming weeks

SA: Countdown to level 3 will see ongoing tobacco ban challenged

Rand: Risk-on trading globally could push the rand to strengthen past 17.50 against the US dollar

Local rates: Issuance and offshore selling counter-acting strong rand 

What to watch today

• GE GfK Consumer Confidence
• SA Leading Indicator
• US Chicago Fed Nat Activity Index
• US Dallas Fed Manf. Activity

Covid-19 update

Source: WHO, NICD

Economics and markets

• The end of the state of emergency in Japan, and widespread news that many economies are planning on opening up over the forthcoming weeks, has pushed Asian markets stronger.
• Increased global risk appetite will be positive for the emerging market currency complex, with the rand eyeing a breach of the 17.50 level against the US dollar.
• It is not all good news though in global markets, with Singapore’s expected economic performance downgraded to a contraction of 7% for 2020, Germany’s unemployment rate projected to increase and Brazil facing a travel ban from the US as infection rates run seemingly unchecked.
• Expected increased economic activity as we move to level 3 of lockdown will perhaps also reveal the extent to which small businesses have been affected, through their absence.
• USD/ZAR opens at 17.64; EUR/ZAR at 19.23; GBP/ZAR at 21.52 and CNY/ZAR at 2.47.

A subtle sense of optimism has characterised today’s Asian trading session. Positive momentum has been spurred in large part by the end of the state of emergency in Japan, and is supported by widespread news that many economies are planning on opening up over the forthcoming weeks. Not even increased tensions between China and the US, nor Hong Kong’s protests are preventing positive momentum. The Nikkei and ASX are both up by over 2%, while perhaps signs of China’s issues are seen in the relatively weaker gains in the Shanghai index and Hang Seng. We can expect this optimism to continue into our trading session today, since SA, the UK and a number of European countries are also facing significant relaxations on lockdown over the next few weeks. This could further increase the risk appetite of investors which will be positive for the emerging market currency complex. The rand will probably continue to benefit from this sentiment, although perhaps not through significant gains as seen last week, rather remaining relatively strong, with a potential breach of the 17.50 level against the US dollar. 

This is not to say that we are seeing the end of the stream of covid-related bad news, in fact news out of Singapore is that it is now expecting a contraction of 7% for 2020, a huge knock to the city-state’s economy, which has increased expectations of further fiscal support. Further, it would seem that the German desire to lose no job in the face of covid-19 is unlikely to materialise, with the unemployment rate projected to increase sharply, while the seemingly unchecked spread of the virus in Brazil has resulted in the US placing a travel ban on South America’s largest economy. 

In South Africa, as the countdown to level 3 continues, we can expect to see some kind of challenge to ongoing restrictions on tobacco sales, as well as just how far the allowance of alcohol sales will go, with restaurants pushing to be allowed to sell alcohol. Further, there are many concerns surrounding the return of scholars to places of education, with the time by which schools must be prepared to meet the PPE and sanitary regulations running out alongside teachable time in the 2020 school year. 

While the movement to level 3 suggests that there will be increased economic activity, it will perhaps also reveal the extent to which small businesses have been affected, through their absence. Today will see the March release of SA’s leading indicator, which will include the latest available data for the 11 components it tracks, and given anecdotal information, we expect that the index will fall coinciding with the implementation of the domestic lockdown. The final indicator of the reality into which we will emerge at level 3 is the call by Zweli Mkize that cities and towns must identify sites for mass burial as government expects SA’s infection count to increase toward its peak in the next few months. 

In these times, it is worth embracing any good news available, just to remind ourselves that this crisis, too, is temporary. 

Siobhan Redford 

 
Local rates

With offshore investors having sold almost R90bn year-to-date, it is hard to imagine the local bond market making significant gains despite the recent recovery of the rand from above R19/$ to around R17.50/$ this morning. The market is at the same time trying to come to terms with the increased issuance which, coupled with the 100% greenshoe option, is definitely placing a floor on the market between Tuesday and Thursday mornings. To this point, we have another R6.1bn in bonds hitting the market today, with the R186/2030/2035 strip’s turn to be auctioned. The National Treasury is doing its best to issue as short as possible to avoid putting pressure on the longer part of the curve as well as to avoid issuing debt at elevated levels above 11%. This is sensible but does mean the R2030, as an example, has an issue size over R200bn and the R186 is heading towards R300bn, although it is a split maturity bond which does help the redemption profile somewhat. Throw in the R197 ILB and R2023 which both mature in R2023 and it does look like some pressure is building in terms of upcoming maturities. We expect the auctions to clear at reasonable levels given local demand but doubt there will be the strong clearing levels 5-8 points through market as seen last week. 

Deon Kohlmeyer