JSE, rand and bonds in week of drama and crossroads in wake of latest downgrade

By Chris Harmse Time of article published May 4, 2020

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JOHANNESBURG - Last week saw great uncertainty on South African financial markets as nervousness started to build up on what the possible effect will be after Thursday, when South African government bonds are excluded from the World Government Bond.

This will imply that most large overseas funds will no longer be able to hold South Africa’s government debt paper. Standard & Poor’s also added to the nervousness as the rating agency on Wednesday further downgraded South Africa’s long-term currency credit rating to BB- with a stable outlook. Pressure started to mount on the foreign exchange market.

It is forecast by analysts that as much as $5billion (R94bn) forced selling of RSA rand denominated government bonds could take place. This is its weight in the $1trillion index.

However, the reaction on the bond market last week, strangely was the opposite. Foreigners were the net buyers of bonds up to Thursday.

The key R186 government bond continued to move stronger as its rate improved from 9.24percent the previous Friday to as low as 8.42percent at the close on Thursday.

This leading government paper improved from 10.48percent the day after Moody’s downgraded South Africa to junk status on March 19.

This is an improvement of more than 2 percentage points or 18.8percent recovery in the yield of the bond.

In reaction to the uncertainty around the exclusion from the World Government Bond Index, the rand exchange fell to as low as R18.03 against the dollar on Thursday morning, before turning around sharply and by Friday afternoon to trade at R18.90.

On Wall Street US equities were sold-off on Thursday and Friday on renewed fear on company earnings in reaction to the announcement that the US economy had shrunk by 4.8percent during the first quarter on the back of the Covid-19 pandemic.

US jobless claims hit 30 million on Thursday. This number had shot up remarkably from as low as 210000 five weeks ago, as 3.8 million workers had filed for new claims during last week alone. The Dow Jones industrial index lost more than 1000 points (4.1percent) on Thursday and Friday.

On the JSE the all share index continues to tick stronger every week. The index gained another 1.6percent last week and closed on 50336 points on Thursday. It had risen by 13percent in April, the most in a month since May 2003, outpacing its emerging market peers by more than 5percent.

The strong gain in the price of Naspers as the share reached new record highs, benefiting from its stake of 31percent in Tencent Holdings, the Chinese Internet giant boosted the all share index. Gold shares also rallied last month as gold bullion recorded its best month since 2016. The Resources 10 index had gained 27percent during April. This coming week investors’ attention will continue to concentrate on South Africa’s government bond market and the rand exchange rate.

Equities will follow the volatile global pattern, as the US market awaits the jobless claims number on Thursday, and the job numbers for April on Friday.

It is expected that the US unemployment rate had shot up to 14.5percent against the 4.4percent recorded in March. This will be far higher than the 10.5percent during the 2008 financial crisis, and the highest since 1940.

Some analysts expect the jobless rate to reach as high as 30percent in the months to come. South Africa will release its latest manufacturing PMI data and new vehicle sales today, while the SA Chamber of Commerce and Industry will announce its latest Business Confidence Index on Wednesday.

Dr Chris Harmse is economist and chief investment officer of Rebalance Fund Managers.


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