Greenshoots

GM Daily: Green shoots

 

Global: Avoiding full lockdown

SA: President Ramaphosa outlines four priority interventions for SA’s economic reconstruction and recovery plan

Rand: Trading sideways, albeit with characteristic volatility

Local rates: MTBPS delay ruffles feathers

 

What to watch today

 

• EC Trade Balance SA
• EC CPI (y/y)
• US Retail Sales Advance (m/m)
• US Industrial Production (m/m)
• US Capacity Utilization
• US Manufacturing (SIC) Production
• US Business Inventories
• US University of Michigan Sentiment
• US Net Long-term TIC Flows
• US Total Net TIC Flows

 

Covid-19 update

Source: WHO, NICD

 

Economics and markets

• The President’s economic reconstruction and recovery plan outlined four strategic interventions for SA.
• The rand’s response to the plan was rather muddled, with the currency effectively moving sideways albeit with characteristic volatility yesterday afternoon.
• There remains a strong possibility that there will be further losses during trade today as uncertainty over Brexit and US stimulus continues, and rising infection rates in Europe have resulted in a risk-off trading environment.
• Prime Minister Boris Johnson will decide today whether or not to continue Brexit negotiations.
• Concessions are being made in reaching a new fiscal stimulus deal in the US, with suggestions that the GOP and Democratic Party are closing in on a deal.
• Increasing infection rates across Europe have policymakers doing everything they can to try and restrict movement and contact in an effort to reverse the trend without having to implement full lockdowns once again.
• USD/ZAR opens at 16.64; EUR/ZAR at 19.49; GBP/ZAR at 21.47 and CNY/ZAR at 2.48.

 

“In the aftermath of a fire, green shoots begin to emerge”[1]. 

President Cyril Ramaphosa delivered this line in his address to the joint sitting of parliament yesterday, and it really hit a button for me. As mentioned yesterday, I was in Kruger recently and the landscape was often striking as there were areas which had obviously experienced recent fires, and given some early rains, the green shoots of the grass were themselves beautiful and striking. This lifecycle is not just confined to SA’s bushveld, as its rich Cape floristic kingdom to some extent relies on fire to continue to thrive. 

The President’s economic reconstruction and recovery plan is the third phase of government’s response to the covid-19 pandemic. It is a sleeker plan than previously, with four strategic interventions outlined, namely: infrastructure rollout, rapidly expanded energy generation, employment stimulus and reindustrialisation. The greatest focus of this plan – job creation – is very necessary in a country that entered the latest economic crisis with rising unemployment. An important aspect of this plan is that it comes from the Presidency, which has greater pull and oversight over all government departments than the National Treasury – from which many previous plans have originated – and which is, ultimately, just one of many equals. It is imperative that the outline of the strategy as presented yesterday is accompanied by a clear plan with deadlines and objectives so that it can be monitored. This said, it is also important that, when necessary, the plan can be adapted or adjusted to enhance its effectiveness or ensure that the best possible outcome is achieved (rather than a “quick and cheap façade”). In my mind, it is better to begin implementation and adapt to unexpected outcomes than to try and put together the perfect plan – it doesn’t exist, and thus implementation would never begin. 

The rand’s response was rather muddled, with the currency effectively moving sideways, albeit with characteristic volatility yesterday afternoon, having depreciated against the dollar in the morning. The local bourse followed global trends yesterday, closing almost a full percentage point lower in the day’s trade. Signals out of the Asian trading session this morning are mixed, with the Nikkei and ASX down, the Shanghai Composite Index relatively flat and the Hang-Seng and Indian stock exchange higher. There remains a strong possibility that there will be further losses during trade today as uncertainty over Brexit and US stimulus continues, and rising infection rates in Europe forcing more and more restrictions on movement across the continent have resulted in a risk-off trading environment. 

[1] Address by President Cyril Ramaphosa to the Joint Sitting of Parliament on South Africa’s Economic Reconstruction and Recovery Plan, 15 October 2020, accessed http://www.thepresidency.gov.za/speeches/address-president-cyril-ramaphosa-joint-sitting-parliament-south-africa%27s-economic-reconstruction-and-recovery-plan

These themes will remain centre stage today and over the next few weeks. The most immediate would seem to be Prime Minister Boris Johnson’s decision on whether or not to continue Brexit negotiations – the news suggests he should make a decision today. It has been suggested that there is still a window for a deal to be struck and ratified before the 31 December deadline when the UK will trade with the EU under either this new deal or WTO regulations. However, the language out of the EU summit’s communique calling for concessions from the British government has not been well received, while it has also been reported that Angela Merkel did tell the British PM that the concessions should be bilateral. 

In the US, it would seem that concessions are being made in coming to a new fiscal stimulus deal and that the GOP and Democratic Party are closing in on a deal. There does seem to be potential opposition coming from within the GOP itself, however President Trump has undertaken to elicit support should an agreement be reached. This is progress and important in helping the US economy continue its economic recovery, particularly as initial jobless claims increased this week. It is good to see that political campaigning has not halted these negotiations. Yesterday’s concurrent town hall events by the two presidential candidates (a replacement for the second scheduled debate) saw politicking continuing along similar lines to those seen thus far in this year’s campaigning. 

The final concern is the increasing rate of infections across more and more of Europe, with many policymakers doing everything they can to try and restrict movement and contact in an effort to reverse the trend without having to implement full lockdowns once again – something few economies can afford at this point. 

Thus, we end the week tracking themes that have become entrenched in 2020. However, there are green shoots, and may they become beautiful blossoms. 

 

Siobhan Redford

 

 

Local rates

With the local yield curve under pressure for so long, there had been an expectation of some good news for a change from the medium-term budget next week. This led to some curve flattening earlier in the week, but the Minister’s requested delay until 28 October saw steepening again yesterday as the market speculates as to what caused the delay and whether the Minister is waiting for good news on the wage front or other positive expenditure outcomes, or whether in fact the economic cluster is indeed losing ground and has not been able to put forward the fiscally prudent budget we all wanted to see. The President’s speech also had a lukewarm response, with good plans and ideas but again light on detail and implementation. 

Given the budget delay and the reaction to the speech, the R2048/R186 gap reached 455 points yesterday, which is an all-time high after improving to 447 points late last week and earlier this week. A large part of this was from offshore investors, who sold across the whole curve yesterday to the tune of another R1bn, with only the R186 showing small net buying. 

On the ILB side, we have the weekly auction this morning with R2bn on offer again across the I2029/38/50 strip of bonds. Another longer-dated auction which should appeal to investors involved with long-term liabilities or CPI-linked mandates given both the I2038 and I2050 are around 4.80% real. We expect both of these to clear around this level with the I2029s around the 4.20% mark. 

There is no local data out today, but watch for US Retail sales this afternoon at 14:30. 

Deon Kohlmeyer