There is more devastating data waiting in the wings

By Chris Harmse Time of article published May 11, 2020

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JOHANNESBURG - Financial markets over the globe continued to recover strongly during last week. Despite horrible US unemployment data during April, where employers had cut jobs by a record 20.5 million to bring the US unemployment rate to 14.7percent, the highest since the 1930s, equity markets just bulldozed into a buying spree.

The Dow Jones Industrial index had broken easily through the 24000 point level on Friday, whereas the S&P500 started to test the 3000 level again.

The Dow had lost 37percent of its value from its record high of 29551points on February 13, 2020, to as low as 18591points six weeks later on March 23. Up to its opening on Friday, the index already had recovered by 29percent. This typical V-format recovery is well known in equity markets just after a black swan incident, like after the September 11, 2001, twin towers attack in the US and the 2009 sub-prime crisis.

Most other equity markets followed the US over the last few weeks with strong increases. On the JSE, the all share index (Alsi) ended Friday on 51003points. The index had lost 36percent from its highest point this year of 59001points on January 17 to 37963points on March 19.

Since then, the Alsi had recovered strongly again by 34.6percent to the close on Friday.

On the capital market the R186 also had reached its highest point of 10.48percent on March 19.

Despite the downgrade of South Africas sovereign debt to junk by Moody’s that has led the way for RSA government bonds to be excluded last Thursday from the World Government Bond Index, the R186 had recovered to as low as 7.68percent on Friday. This is an improvement of 25.4percent or 2.8percentage points within two months. Resources (2.4percent) and Industrial shares (1.8percent) continue their strong rally, despite the news that the South African Business Confidence Index had tumbled to 77points, the lowest since 1985.

The question now remains if this is not a dead cat bounce as more and more devastating economic data for the second and third quarter will start to emerge in weeks to come? Can we therefore expect that equity and bond markets will just move in a W-formation and that another strong collapse is about to emerge?

It seems that the extent of the Covid-19 infection recovery and death rate will determine how fast countries all over the world will abolish their lockdowns. Together with the enormous economic stimulus packages that were introduced by most developed countries, economic growth can quickly recover.

Share and bond markets seem to price in this scenario as financial markets continue to recover.

Domestically, the opening of some sectors of the economy last Friday also gave some momentum for foreign and domestic investors. As the mining, agriculture and retail sector forms the bulk of the opening up of the economy, economic prospects for the second and third quarter may be better than expected. Clothing retailers last week saw a sharp increase in their share prices as shopping malls started to open up again.

The rand exchange rate started to emerge stronger last week. The currency gained 54cents against the dollar and traded Friday afternoon on R18.33 against the R18.87 of the previous Friday. Against the pound the rand recovered by 80cents from the previous week and ended Friday on R22.81 and R19.91 against the Euro down from R20.76.

This coming week investors’ attention will concentrate on the release tomorrow of South Africa’s unemployment rate for the first quarter of 2020. It is expected that the rate had gone up sharply to 35 from 29percent during the fourth quarter last year.

Dr Chris Harmse: Economist and Chief Investment officer at Rebalance Fund Managers.


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