Yet another week of the Rand moving counter to logic goes by, as we saw the market testing below R17/$ for the first time in 3 weeks...
...what could cause positivity like this in emerging markets?
Well, sometimes logic doesn't apply to markets.
In fact, most times.
Which is just what we have proved over these crazy last few months - just take the stock market recovery as an example...
Completely irrational considering the pandemic situation in the US, yet optimism just somehow sustains the incredible V-shaped recovery for the Dow Jones, S&P500 & NASDAQ (which has broken way up and above to new highs).
But that is just what markets are. Always have been, always will be.
So with that in mind, let's get into breaking down what happened over the 5 days...
Firstly, here were the biggest talking points from the 5 days:
- SA GDP - after better than expected figures came out for Q1 2002, attention turns towards Q2 2020...with the outlook not looking good
- US jobs recover fast - more above-expectation jobs numbers came out, renewing hopes of a V-shaped recovery...
- Covid-19 hits 10 million - but all the while, the pandemic continued at record pace, smashing through the huge levels of 10 million cases and 500k deaths
- Rand rallies again - jittery markets continued, but the Rand rode a wave of optimism stronger to break R17/$.
With the Rand opening the week around R17.30, all eyes were on when we would see a breakout of the market.
After two weeks of mostly trading sideways, some action was due, and with the slew of economic events upcoming, there was doubtless going to be some.
The first was due on Tuesday, with SA's GDP figures due for release for Q1 of 2020...
...they did not make for pretty reading.
Although better than the expected 4% contraction, a full 2% decrease meant that the recession was continuing, before Covid-19 even happened.
For SA, lockdown began on 27th March, right at the end of Q1. For the majority of Q2, lockdown was in effect - and this is where we are going to see the real reaction in GDP, when these figures are reported.
For now, we only have estimates, guesstimates and expectations, but the Reserve Bank is expecting a 32.6% contraction of the economy in Q2...
Let me just repeat that: almost one THIRD of the entire GDP of the country, completely wiped out. Astounding.
Will persons finally see sense as to how destructive a lockdown is?
Based off of this case, for an emerging country at least, it is nothing short of economic suicide.
So, as with unemployment figures, we will see the real damage when Q2 figures come out...but even now, it is plain to see the hole from the wrecking ball - a combination of Covid-19, but mostly government's reaction to the virus itself.
So what was the Rand's reaction?
Very muted. Gently traded a little weaker.
But then on Thursday, we saw it reverse sharply against the Dollar, strengthening down to test towards R17/$.
Rational markets? Try sell me another one.
And then looking to the global scale:
- Worldwide Covid-19 cases continued to rise sharply, pushing through more than 10 million cases over the weekend, and more than 500k deaths. The virus is by no means slowing down, and had gained more than 10% worldwide before the end of the week, topping well over 11 million cases. Increased testing does of course mean more cases (who knows how many were never tested but have had the virus and recovered from it), and this does explain some of the seemingly 'sharp' acceleration of cases...but on the whole, the spread continues.
- US manufacturing for June rose to its highest level in a year as their economy reopened amidst the ongoing coronavirus pandemic. Fed minutes showed the institution is not even thinking about raising rates at this stage, with the view that the economy needs vital support going forward. Yet, we saw another 4.8 million jobs added in the Non-Farm Payrolls on Thursday, as unemployment in the US fell to 11.1%...
- Back locally for the Rand, the current account balance made for some interesting reading with the first surplus in 17 years. As noted by economists, this would typically be a sign of a flourishing country which is exporting more than it is importing…but what is more likely is that the demand is dropping steeply for imported products locally, as the economic situation begins to really bite consumer's pockets.
- Also locally was reports that loan talks were continuing to take place between the IMF and South Africa, but at a "measured pace". The discussions are around the $4.2bn which SA is seeking to support its fight against Covid-19. As a whole, the country is looking for around $7bn from different institutions to assist with this.
- In more Covid news, the University of Oxford’s Covid-19 vaccine has shown encouraging results, with “the right sort of immune response that will give protection, and not the wrong sort” seen in Phase 3 of human trials.
As for the Rand, we saw a fairly quiet trading day on Friday as the US celebrated an early Independence day holiday, rounding off the week climbing slowly back over R17/$...
So after what had looked like the breakout week for the Rand, ended in a bit softer with the market trading at R17.06 at the SA close, but still an almost 40c gain on Monday's open!
The Week Ahead (6-10 July 2020) |
As we look to the week ahead, there are almost no economic events of note at all, with basically just the US jobless claims coming in...
...but the Rand has never waited for a trigger to do its thing.
Never mind the emotions already running high with so many ongoing local and global issues, trade wars, middle-east tensions and more.
And the balance of all these emotions of all the persons involved in the Rand market will dictate where the market is headed...
...and those same emotions are your worst enemy.
When the market is panicking, it is extremely difficult to make rational and educated decisions that often mean doing the opposite of what your emotions are telling you.
And that is why we rely on our Elliott Wave based forecasting system to give us a scientific-based objective view of where the market is likely headed in time and price.
Based on the current analysis and forecast, we expect a few surprises (for the unprepared) the next week or two and we will be closely watching some key levels to confirm or invalidate our preferred outlook.
(You don't want to regret not having done so this time next week...)
Look forward to hearing from you.
To your success~
James Paynter
