February 2020
Markets, exchange rates, commodities, international developments
Markets are in a state of fear, driven by Covid-19 virus contagion.
Clear Covid-19 trends emerged. In China, where it all started, containment was attempted, by limiting social contact and working. It had limited success, though, as the virus spreaded.
Containment are now the focus in 64 countries, but the virus spreads to more countries each day.
Market fear is driven by the reach of the virus rather than the deaths it caused - as a wider reach means less production/profits. For instance, up to end February 86 992 cases were reported causing 2 979 tragic deaths. But 80 223 tragic flu deaths occurred over the same period.
Once market fear gains momentum, it steamrollers in the absence of positive news. The JSE ALSI lost 9% in February – the loss year to date (Ytd) is 10.6%. Listed Property lost 15.7%, General Retailers 11.6%, the Financials (15) 8.2%, Industrials (25) 6.5% and Resources (20) 11.6%.
The ALBI lost slightly (0.09%) in February as the yield on the R186 increased to 8.14% from 8.02%.
Internationally, the MSCI Developed Market Index lost 8.6% in February and the MSCI Emerging Markets index 5.4%.
The Dow Jones lost 10.1% (11.0% Ytd), the S&P 8.4%(8.6%), UK FTSE 9.7% (12.8%), German Dax 8.4% (10.3%), French CaC 8.6% (11.2%), Japanese Nikkei 8.9% (10.6%), Hong Kong Hang Seng 0.7% (7.3%), Chinese Shanghai 3.2% (5.5%) and the Australian ASX 8.6% (4.3%).
Resources declined due to the impact of the Coronavirus. Brent oil decreased 12.3% to $50.5 per barrel, (24.8% Ytd), platinum 9.9% (10.4%) and gold 0.2% to $1586 per ounce (still up 4.6% Ytd).
The US$ strengthened against most currencies as news of the virus spread. The US$-index gained 0.8% in February. EM market currencies were hit hardest. The Rand depreciated to R15.67/$ (another 4.2%) bringing its total depreciation Ytd to 10.6%. The rand ended February at R20.06/pound (down 7.5% Ytd) and R17.28/euro (9.2%).
The fears in markets can continue in March - as major central banks opined that the media/markets are overreacting. However, they at the end of February, also did what markets want to hear – saying they will act if necessary! Also, once positive news sets in, a partial recovery may occur rapidly.
Budget 2020/21
Markets received the budget positively as it contributed to higher share prices, declining yields and a stronger rand (this was however quickly wiped by the Covid-19 fears).
The positive reaction was mainly due to an unexpected cut of R2 billion in personal income tax and a 0.2% lower budget deficit over the next 3 years. However, debt service costs are still growing - as expenditure cuts (mainly as a proposed cut in civil servant remuneration) are insufficient to curb the growth in the debt burden, mainly caused by allocations to Eskom and other SOE’s.
The Budget may postpone a Moody’s downgrade in March, but will not contribute to faster economic growth in 2020. That said, economic growth for Q4 2019 may be positive (following a contraction in Q3 2019) for different reasons – see below!.
Inflation and repo rate
YoY CPI for January increased to 4.5% from 4% in December.
Increase due to very low base year ago and higher food and administered prices.
Government involvement CPI 9.5% in January vs 7.2% December; demand inflation just 2.9%.
Credit extension
Private sector credit growth slowed in January to 5% from 6.1% in December.
Households credit growth remained at 6.3%, but that of companies slowed from 6% to 4%.
Retail and Wholesale trade, passenger cars, FNB House Price Index (SA = seasonally adjusted)
Total domestic trade performed mixed in Q4 (Wholesale sales dominate domestic trade).
Retail sales Q4 QoQSAA = 0.4% vs 0% in Q3. Will add marginally to economic growth.
Wholesale sales Q4 QoQSAA = -3% vs 10.4% in Q3. Will deduct big from economic growth.
New vehicle sales up 5.1% in Q4 vs Q3. January passenger car sales YoY down -5.1%.
FNB real house price index YoY down -0.5% in December. Q4 vs Q3 = 0%.
Mining, manufacturing, and electricity production (QoQSAA=quarter on quarter seasonally adjusted)
Q4 results are mixed – but will all be better vs Q3 and therefore positive for Q4 economic growth.
Mining Q4 QoQSAA = 0.3% vs -6.4% in Q3. Will add to Q4 economic growth.
Manufacturing Q4 QoQSAA = -0.3% vs -4.5% in Q3. Will subtract less from economic growth.
Electricity Q4 QoQSAA = -1.5% vs -1.9% in Q3. Will subtract less from economic growth.
International trade
Trade deficit of R1.9 billion in January. This is 85% less than the deficit a year ago.
Courtesy: Multivest Economic Division