The markets are still nursing the hangover from Brexit, with the Pound extending further losses and trading below R19.5000 against the Rand. While not a fantastic exchange rate, it will be enough to at least shut up the Barmy Army and their song of: “R24 to the pound”.
All jokes aside, the post-Brexit rally has been expected and also surprising, expected that Emerging Markets (EM) weakened after the announcement and also very surprising in the Rand pulled back the ground it lost after Brexit in the latter part of the week.
The reason for the pullback is a lot clearer to fathom than the mentality why it is happening. The reason being a huge influx in South African bond and capital markets, with the bond market topping out at R19bn in the past two weeks and the equity market R61bn.
The question though is why? Why when markets are jittery have we seen these massive amounts of inflows, which certainly goes against market convention that we have been preaching. Maybe it’s the search for yield which can be very short lived, and the outflow could be as swift as the inflow, or it could be the recent surge in the commodity prices that makes South Africa a more appealable destination, the list of maybe’s are endless.
The fact of the matter is that the inflows need to stay in South Africa, and more inflows are needed for the Rand to stage a nice recovery otherwise, volatile trading is set to continue as sentiment shifts indiscriminately between “risk-on” and “risk-on”.
The Brexit binge will continue to plague the market for the time being as we have seen data being swept by the wayside in the past couple of weeks. The next big Brexit issue will be the meeting of both the ECB and BoE next week when we can expect more volatility in the market.
It seems that there is a bit of turmoil in the Brexit camp with both Boris Johnson and Nigel Farrage ruling themselves out of becoming the British Prime Minister. The men mentioned above were both the heavyweights in the Brexit camp and with them dropping out of contention, some questions are bound to be asked about how resolute the Brexit campaign was from the start.
Could it be possible that a “remain” candidate will have to take the reins and lead Brexit? Interesting times indeed.
Some interesting South African data was the release of the trade balance last week when we saw a very good surplus. The data could be very deceiving as it could only mean that imports have taken a nosedive, but good news has been few and far between, and we’ll take it.
These numbers need to continue for the current account to decrease significantly and ease some of the pressure on the economy and give some breathing room to an already stretched system.
Yesterday, we saw very little market reaction in the wake of the US celebrating Independence day, which begs the question whether the UK will start celebrating the 24th of June as their Independence day.
This week should give the market time to nurse some of the Brexit hangover and the market to find some stability before we head into next week where there are very important BoE and ECB meetings as mentioned above.
On Friday we will see the US non-farm payroll number which will be the first data release since Brexit that can cause any market reaction. Expect the number to be a huge improvement from last month but the days of 250,000 plus jobs are probably numbered due to the fact the US are nearing full employment levels.
In Rand terms be on the look-out for any change in capital inflow as the inflow that the South African Market is seeing at the moment can be withdrawn as quickly as it came in. Outflows will lead to the Rand weakening and fuel the volatility fire, but for the moment the inflows are helping the Rand. The R14.50 level seems very tough to crack, and any move below that should be seen as a definite buying opportunity. The Euro is near 2016 lows at 16.3000 which would be a nice time to climb in.
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