Your favourite Weekly Rand Review is back!
Welcome, and thanks for joining us as we unpack the latest trials and tribulations of our local currency and try to make sense of an ever-changing and volatile market.
If nothing else, last week proved to be an eye-opener, as major global banking concerns dominated news headlines worldwide, bringing flashbacks of the Lehman Brothers debacle that spurred the financial crisis in 2008…
…while on the local front, domestic challenges remain rife, with severe power constraints, political instability, rising interest rates, and stagnating household incomes all adding to the mayhem.
A challenging week for the local unit. Let’s recap what happened.
Key Moments (13-17 Mar 2023)
Here's what made the headlines last week:
- Global Banking Contagion - The dramatic collapse of Silicon Valley Bank and Signature Bank sparked contagion fears as the rot spread to Europe, leaving investors scrambling to dial back risk positions.
- Local Data Disappointment - Mining, manufacturing, and retail sales figures all kicked off the year on a sour note, with all three key sectors posting year-on-year contractions, adding to concerns over the local economy slipping into recession at the end of Q1.
- US Inflation Eases in Feb -The US Bureau of Labour Statistics released headline inflation results from the world’s top economy last week, which showed further improvement, receding by 0.4% in February.
And with that, let’s jump straight in.
We’ve been saying for a while now that the relentless rate-hiking process of central banks, especially the US Fed, was bordering on reckless and could have potentially catastrophic effects…
…and that’s exactly what seemed to have begun playing out last week.
The 16th largest bank in the US, Silicon Valley Bank (SVB), was taken over by regulators, who seized the bank's deposits after it claimed that it was forced to sell part of its bond holding at a loss of $1.8 billion.
Here’s the backstory:
SVB had become a startup tech sector favourite during the pandemic period when the sector was prospering through people spending money on tech gadgets and similar items.
Tech companies, in turn, used SVB to hold their cash, and with the sudden large influx of deposits, the bank invested the money (as all banks do), choosing long-dated US government bonds and securities as the main destination for the cash.
All pretty standard stuff up to this point...
Understandably, those investments looked good back then, provided the bank held them until maturity; however, several recent factors combined to turn those investment decisions into the start of SVB’s demise. Since the commencement of the US Fed’s aggressive rate hiking process last year to slow inflation, mortgage-backed securities have experienced a steady fall…
…and in the case of SVB, their bond portfolio began to bleed in value.
Now, add to that the recent struggles in the tech sector, with companies like Amazon and Microsoft conducting mass layoffs, plus the need for those companies to draw on their sizeable bank deposits as cash flow dries up…
…and what you’re left with is a recipe for a perfect storm.
As more customers asked for their deposits back, SVB was forced to sell its bonds quickly to create liquidity, which ultimately led to a $1.75 billion loss post-sale!
And once this became known, it sent customers and investors into a frenzy, demanding their deposits back out of fear, which caused a run on the already-troubled bank.
The Net Result?
SVB officially collapsed on the 10th of March -
...the second-largest banking collapse in history!
Just 48 hours later, the Federal government moved to prevent further contagion, closing a second bank, Signature, on Sunday after the bank saw a torrent of deposits leave its coffers on Friday following the demise of SVB. While there are likely numerous companies and sectors that have suffered the same fate as these banks already, high-profile collapses of this nature bring to light the damage that relentless rate hikes can do.
A wicked circle - the Fed hikes rates, companies and investors lose money due to lower returns plus a higher debt servicing costs, and the Fed then steps back in to shut them down...
...make any rational sense?
All that and the week didn’t even get underway!
As the trading week approached, investors were aware it was going to be a week where things could go cattywampus quite quickly as the local unit made its first showing at R18.18/$.
On Tuesday, Stats SA released the all-important mining and manufacturing data, which continued the narrative of ongoing weakness in the local economy following last week's poor GDP figures.
Mining output contracted by 1.9% in January, recording its 12th consecutive month of annual contraction, while manufacturing output slumped by 3.7% over the same period. The losses in both sectors can be attributed to several factors, chief among which is the surge in rolling blackouts, which continues to chip away at the country’s economic outlook for the foreseeable future. With no tangible proof of the energy crisis abating since the new electricity minister's introduction and the ongoing turmoil at Transnet, it’s difficult to see how these crucial sectors can make much improvement in this quarter or beyond.
For now, recession watch will likely remain the order of the day!
The Rand stepped into Wednesday trading in the low R18.10s, braced for action with the US CPI results expected later in the day…
…but before that, another banking bombshell dropped, with the latest victim being none other than Switzerland’s Credit Suisse!
Switzerland’s second-biggest bank tanked by almost 25% after its main shareholder, Saudi National Bank, stated that it would not provide any more financial assistance to the Swiss banking giant. The decision taken by Saudi National Bank came one day after an annual report showed “material weakness” in the internal controls of the Swiss bank, which has already seen a series of scandals in recent years….
…bringing back vivid memories of the global financial crisis in 2008.
Queue the madness!
The developments at Credit Suisse sent tremors through the markets as investors flocked to their banks, demanding withdrawals and security, in the fear that a potential banking contagion threatened their hard-earned cash. Within hours, Britain's Barclays, Germany’s Commerzbank, and the US JP Morgan’s shares all dropped by nearly 10%. First Republic Bank shares were amongst the hardest hit, collapsing by almost 20% on the day, bringing their total loss over the preceding week to a jaw-dropping 70%+.
The fear continued to spread to Asia, Paris, and Frankfurt, with several banks, including HSBC, recording notable drops, some falling as much as 5% by the day's end.
With the chaos in the banking sector dominating attention, the news of US inflation easing by 0.4% to 6% in February largely fell by the wayside.
Core inflation edged 0.1% lower; producer prices also fell by 0.1% over the same period off the back of receding egg, gas, and diesel prices; and retail sales contracted by 0.4% from a month earlier. In recent weeks, several Fed officials have lined up to explain that we could see rates going higher for longer due to several strong data points…
…but with the collapse of SVB and the impact on other banks, the debate now is about whether the Fed will continue its tightening campaign since the reason for the collapse is largely linked to the sharp rise in borrowing costs.
Can the dramatic implosion of these banks bring the Federal Reserve’s monetary tightening policies to an end sooner than expected. It’s certainly an unenviable position to be in for the US Fed, as it now has to deal with the aftermath of its irrational decisions taken over the past year!
The local unit, which we know is significantly impacted by such global forces, was forced backward in the wake of the news falling to R18.49/$ by Wednesday evening.
The last major piece of local economic news for the week came on Thursday in the form of retail sales figures, which showed a shrinkage of 0.8% in January, following a 0.5% decrease a month earlier. Food and beverages recorded the steepest decline at 7.3% YoY, followed by hardware material with a 4.8% drop and pharmaceuticals, which took a 2.0% knock.
As trading opened on Thursday, the Rand was in the R18.40/$ region as investors were still jittery from events of the previous day, which understandably deteriorated global risk appetite…
…and will likely remain at the forefront of the US Fed’s thinking when they take the spotlight with their monetary policy decision on the 22nd of March.
How quickly things can change!
And then, a quick look at some other major headlines from last week:
-
- Amid the turmoil in the banking sector, ECB President Christine Lagarde announced a further rate hike of 50 basis points while also signalling that the central bank will supply liquidity to banks if required. Lagarde went on to explain that the ECB had also revised its headline inflation expectations to average 5.3% in 2023 and 2.9% in 2024, lower than the 3.4% it originally projected last December.
- The eagerly-watched US labour market continued its resilience as results on Thursday showed that the number of US citizens filing new claims for unemployment benefits fell more than expected again last week, decreasing by a further 20,000 to 192,000, marking the largest drop in new claims since July 2022. The report also showed that the number of people receiving benefits after an initial week of aid decreased by 29,000, suggesting that some laid-off workers may be finding employment relatively easily after their initial job loss, though it does not shine any light on the salary gap between the two.
Overnight, the local unit took back some ground, opening at R18.34/$ and traded sideways for most of the day, eventually ending the week in the mid-R18.30s...
…slightly down from where it began the week, though it could have been a whole lot worse!
And then, as if there aren’t enough challenges facing the South African economy, the EFF has warned businesses and companies nationwide to shut down on Monday…
…as the party, along with other bodies such as SAFTU has declared that they will embark on protest action due to the current energy crisis, unemployment rate, as well as for the resignation of President Cyril Ramaphosa.
With several similarities in the buildup here to the unrest that took place in 2021, business owners and communities have been left rattled despite the EFF claiming that the protest will be lawful and peaceful. Ramaphosa has since addressed the nation explaining that law enforcement and security companies will be on high alert on the day; however, there is still a nervous feeling in the air as most business owners still remember the aftermath of the incident in 2021.
One has to admit, though, that a cessation of business activity, claiming that it’s being done to improve unemployment and a poorly performing economy, is counterproductive and will do far more harm than good - it is plain illogical.
And with that, we close the book on what has been a whirlwind of a week.
The Week Ahead (20-24 Mar 2023)
In a shortened week locally, owing to Human Rights Day, here’s what we will be keeping an eye on over the next five days:
- SA: Inflation Rate YoY (FEB), Consumer Confidence (Q1)
- UK: Inflation Rate YoY (FEB), BoE Interest Rate Decision, Retail Sales YoY (FEB)
- US: Fed Interest Rate Decision, FOMC Economic Projections, Fed Press Conference
The fears over the banking sector will add yet another layer for the US Fed to take under consideration at their next monetary policy meeting next week…
…with a large faction of investors and citizens hoping that the SVB and Signature Bank’s demise will act as a sounding board for the Fed to slow its rate hiking campaign and ease the stress on the financial sector.
Will the Fed buckle under the pressure or stay the course?
Come back next week to find out!
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