Sasfin : Forex Daily Market - Business conditions worsened in the last 3 months

Today's Talking Point

Standard Bank PMI: Nov

Expected: 49.0

Prior: 48.6

Analysis: Business conditions have worsened in three of the last four months, which is likely to reflect poorly in third-quarter economic data. Given the metalworkers' strike that's was primarily responsible for the deterioration in business conditions in October has now ended, expectations are for a recovery in the final two readings for Q4. That said, additional headwinds for the private economy, namely the return of load-shedding, elevated commodity prices, weak fiscal dynamics, and the absence of reforms, will delay a return to full production capacity suggesting a swift recovery in the coming months may be unlikely.

Rand Update

Into the week's final trading session, the recovery that began at the start of the week has consolidated. Interestingly, this came against the backdrop of a strong upsurge in infections which topped 11,000 per day and continues to rise. The epicentre appears to be Gauteng and will undoubtedly prove disruptive to business as many households isolate and take sick leave as they wait for the symptoms to pass. However, while infections are rising rapidly, the symptoms in this latest Omicron variant appear to be milder.

Although it is early days, if the symptoms are milder, this may give the world something to cheer on instead of fear. Suppose the virus has mutated to a far less severe variant and is highly transmissible. In that case, it may very well wash through the global population far quicker and help build global levels of immunity that render Covid restrictions redundant as hospitalisations remain under control.

Equity and other riskier markets have regained any lost ground, with some fresh records eyed before the end of the year. While politicians appear to have overreacted to a variant that may be a blessing in disguise, the financial markets appear well-positioned to take advantage. Lest we forget, there is still a tremendous amount of stimulus that still needs to wash through the global financial market system, and that will result in some impressive risk market performances.

Although SA tourism has suffered a tremendous blow at the worst possible time, there may still be something to look forward to before the end of the year if this latest mutation signals the beginning of the end of the pandemic. Scientific analysis must confirm what many are anecdotally describing as a milder variant. That holds the potential to be a significant market driver through the coming weeks. Good news on this front holds the potential to drive a powerful risk rally that will capitalise on all the stimulus still unfolding in the background. This may reflect the reasons why the ZAR has stalled its depreciation and appears to be in a holding pattern until more information is received.

Bond Update

Political volatility could reach Parliament shortly. Business Day reports that the "Supreme Court of Appeal (SCA) ordered that the new parliamentary speaker, Nosiviwe Mapisa-Nqakula, take a "fresh decision" on how to run a vote of no confidence regarding Ramaphosa." The ruling comes after the African Transformation Movement (ATM for short) requested that a secret ballot vote of no confidence be tabled against the president. The reasons stated in the court document are the "contention of the ATM that State-Owned Entities had collapsed on the watch of the President, that he had misled Parliament in stating that there would be no load-shedding but that this had eventuated, and other aspects of alleged poor performance of his role."

Data released yesterday showed that Eskom's load-shedding drove a 3.6% y/y drop in electricity output in October. There is clearly slow progress in reform. ATM's filings were submitted in February of 2020, yet power outages remain a regular occurrence. However, the stated reasons of SOE failure and Eskom's inadequacy are too structural to be improved in a single term. The president is perceived positively by civil society, while some kudos are due insofar as he has sought to maintain the political identity and legitimacy of the ANC in a challenging period. While votes of no confidence have been a regular part of South Africa's democratic landscape, given years of profligacy and political nepotism, they have not been successful.

Local political developments are unlikely to be significant drivers of the market. Instead, the focus will shift to the US non-farm payrolls up for release where another strong outcome is expected. Keep an eye on wage growth as a sign of second-round impacts from inflation. Against this backdrop, the ZAR remains a little undecided. Concern surrounding the new variant continues to circulate domestically, with alarmists highlighting a far higher degree of transmissibility, although anecdotal evidence suggests milder symptoms. Data confirms a rise in infections in Gauteng in particular. The knock-on to hospitalisations will drive government policy. Due to various reasons, this wave will be far milder than prior waves.

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