Prospect of lockdown ending boosts markets

FINANCIAL markets continued to improve, due to reopening plans in the US indicated guidelines on restarting the economy. Germany announced a progressive lifting of its lockdown to begin early next week by opening its motor production plants.

As a result risky investors moved out of gold and the dollar and back into equities and bonds during last week.

Equity and bond markets across the world had a third week in a row recovery as signs of a more flat Covid-19 infection and death curves emerge.

South Africa also started with a slow process of lifting lockdown rules at its harbours to assists in exports of agriculture and resources will start with normal services. Mines will also restart with controlled production next month.

Domestically the “unexpected” meeting by the Monetary Policy Committee (MPC) this past Tuesday came as a surprise, although economists and analysts did expected another cut in the repo rate by at least 100 basis points next month.

The bank had adjusted South Africa’s economic growth rate for the year to -6.1 percent, compared to -0.2 percent just three weeks ago.

The central bank, however, also expects a U-shape growth trajectory with the economy starting to recover during the last part of the year and economic growth is expected to increase to 2.2 percent in 2021 and 2.7 percent in 2022.

The MPC also forecasts that South Africa’s inflation rate for 2020 will be about 3.6 percent, with inflation starting to increase again during the middle of the year due to imported inflation as the rand stays under pressure and the oil price may start to move upwards again.

Despite these, there are strong perceptions that another cut in the repo rate is on the cards when the MPC is set to meet in July.

The news last week that the US jobless claims had jumped considerably from 210 000 three weeks ago to 22.5 million on Thursday, contributed to some negative sentiment in financial markets, but the announcement of the stimulus packages plan by the Trump administration on Thursday evening boosted share prices in the US at the opening on Friday.

The Dow Jones Industrial index had opened on Friday more than 350 points (1.55 percent) higher and broke through the 23 900 point level again. The S&P 500 index also are starting to test the 3 000 point level as the index opened on Friday on 2 836 points (1.33 percent higher). For the week the two indices gained more than 1 percent.

Domestically equities and bonds continued to improve strongly. The all-share index on the JSE gained 2.3 percent last week and had tested the important 50 000 point level a few times on Friday. The index is 20.6 percent higher since a month ago moving in a in a typical V-formation. The Resources 10 index was up for the week by 3.9 percent. The Financial 15 index, in reaction to the much weaker rand traded down for the week by 5.3 percent, while Industrials (due to rand hedging stock) had gained 4.2 percent. Listed Property surprisingly continues to improve as the index had gained another 1.2 percent.

On the bond market, despite the weaker rand the R186 government bond had improved by 6.9 percent last week from 9.77 percent the previous Thursday to 9.1 percent on Friday.

The sudden lowering in the repo rate, as well as some negative sentiment towards emerging market currencies had contributed to the rand exchange rate to have depreciated strongly last week. The rand was weaker against the dollar with 91 cents (5.1 percent) at the close on Friday, trading at R18.84/ dollar against R17.93 the previous Thursday. Against sterling the currency had depreciated by 5.5 percent, or 122c, at R23.54; and against the euro the rand lost 89c last week to trade at R20.46.

Oil prices remain low and, therefore, despite the much weaker rand, the petrol price on Thursday was still over recovered by 180c a litre and diesel by 120c.

If such a price decrease will be announced for the beginning of the next month, consumers in Gauteng will pay R12.16 per litre, or R4.51, less than the R16.67 per litre at the beginning of May last year. This is a decrease of more than 27 percent and should bring down the inflation rate for the next month by more than 1 percent.