It was Benjamin Franklin who said that the only certain things in life is death and taxes. A couple of months ago if you asked most South Africans, what the chances of a rating downgrade was , the most common answer would have been : “a dead certainty”.
From those pessimistic notions that everybody had, fast forward to last week Friday, and the almost unfathomable happened and South Africa was not downgraded. 2016 might be the year of the unexpected and could drive a spanner in the works of all that was known about markets.
Although the can has been kicked down the road until December, South Africa has bided some time and more trained ears will be lent to the mid-term budget speech to establish whether the government has followed through with the endeavour to cut government expenditure.
The emphasis the government has placed on cutting the fiscal deficit has drawn praise from S&P as well relative electricity stability in the recent months with fewer incidences of load shedding.
This has alleviated some worries about the infrastructure of South Africa, but there are some glaring issues that still raises the eye brow of S&P with the political climate and the slow economic growth chief among those.
While we shouldn’t be popping the champagne at the moment as this is only a small victory in a major challenge, but a lot of small victories will lead to a major challenge to be overcome.
News from further afield, was the release of the US non-farm payroll numbers on Friday. The number came out at a paltry 38,000 jobs in May. The lowest since 2010 as the 2 previous releases were also revised downward.
Unemployment fell to 4.7% on the back of these number which can only mean that more people fell out of the job market and are not actively looking for employment.
This could suggest some underlying issue in the US economy and that rougher times are ahead and the “dead certainty” of a June hike has all but dissipated. BUT….
And this is a big but, the US job market has been near full employment for the past year and some sort of drop off in the new jobs created can be expected. Yes, the headline number is disappointing but wages are higher, which a while ago was also an important number. In the recent past the US data has been very positive, which is in stark contrast to Friday’s number. This could be the an opportune time to shift the focus away from employment numbers and more towards inflation which has a direct correlation to interest rates that employment, unless you still live in the 1950’s and belief in the merit of the Phillips curve.
The effect on the Rand was immediate as the US dollar lost ground 1.1100 to the Euro to close the weekend at 1.1360. This along with the keeping the rates on hold, led the Rand trading 50 cents stronger at the close of the markets as when it opened. The Rand closing in touching distance of the R15.00 barrier against the US dollar at 15.0800.
There will still be some fallout from last week, as we enter the week and we can expect the Rand to trade quite wildly as the market tries to make sense of last week and find its feet again. The feeling is that the Rand will be closely correlated to moves in the US dollar at the start of the week.
It will be interesting to see how much Friday’s non-farm payroll numbers impacts Yellens speech and whether she see it as a worry going forward or if she will keep her hawkish tone as the number was one data point that failed to deliver. Should she reign in her approach we could see some further Rand gains and dollar losses, but whichever way see leans will affect markets.
On the South African front the release of the South African GDP numbers on Wednesday could be a market mover as a lower than expected number could only affirm S&P fears and could weaken the Rand somewhat. On Wednesday Fitch will release their credit rating of South Africa, and they are expected to change their credit outlook to negative to bring it in line with S&P. Should this be the case we can see renewed Rand weakness.
For now at least the Rand has survived the start of June and although a lot of hurdles are still in the way, we could all hear the collective sigh of relief around South Africa on Friday. Although our view of certainty has been distorted somewhat it seems that the volatility that the Rand had in the first part of 2016, will most likely set to continue in the latter part of 2016 as this exercise of rating agencies will only be repeated in December. So buckle-up and expect a bumpy ride.
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