May 2020 - The sharp decline in March was overdone
Share markets, exchange rates, commodities, international developments, domestic economic indicators
The strong recovery in financial markets during April was followed by a further, but more moderate recovery in May. It must be said, though, that the sharp decline in March was overdone.
In especially developed markets the panic caused by the Covid-19 virus in March seem to have faded.
The MSCI Developed Markets Equity Index, having dropped 8% in February and another 26% in March, increased 29% in April and now 4.6% in May. The recovery can be attributed to fiscal and monetary stimulus, some economies opening-up and expectations that the worst is behind us.
However, the MSCI Emerging Markets Index gained only 0.6% in May as the latter’s recovery was halted by the normal “pre-Covid-19” news, namely a renewed bout of US-China tensions, (trade, US proposed financial market restrictions on some Chinese firms and the US’ criticism of China’s proposed security control over Hong Kong), as well as a new round of Brexit-disagreements.
However, overall, the risk-on mood was victorious. Apart from contributing to higher share prices, the US$ declined (aggravated by riots in the US due to police brutality), while the price of oil surged. The US$-index was down 0.8% for the month, while Brent oil was up 63.3% to $36.8 per barrel.
Going forward, markets seem to be prepared to ignore bad economic news, rather focusing on signs of stimulus, news of a vaccine and the opening of economies. This means that when economic indicators are worse than expected, declines will not be as big – but when it is better than expected, increases will be larger. Caution should be exercised though, due to the chance of a second round of lockdowns.
In South Africa, the JSE ALSI was up, but volatile. It was assisted by the risk-on mood, but negatively impacted by the above factors that impacted emerging markets - as well as the government’s “imbalanced” lockdown regulations and decisions, which suppressed the economy further.
The extent of the economic wreckage caused by some of the regulations and the length of the lockdown became visible in some of the economic indicators published in May.
The lack of economic activity is revealed in deposits at banks that increased by R260 billion in March and April vs R200 billion for the whole of 2019; outstanding credit of households decreased by R18 billion (normally increases) compared to March; passenger car sales in April declined by 99.6% (YoY); and the trade surplus of R34 billion accumulated during Q1 was wiped out in one month (April).
Barring some serious interventions, this suggests huge unemployment coming – but prospects should improve as the economy opens for more business.
Bonds continued its good performance on the back of among others, a 50-basis points reduction in the repo rate, while the rand strengthened against the weaker dollar.
Courtesy: Multivest Economic Division