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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

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