Market Update | 20 March 2020
James Mckeown, director of Domisa Treasury shares weekly market updates, along with his current view on the South African market.
Levels at the time of writing: USD 17.39; EUR 18.70; GBP 20.64
- SARB cuts rates (19 Mar 20) aggressively to 5.25% with barely any movement in ZAR or bond yields, fears of significant negative response unfounded indicating the change was priced into the market
- Bond Market barely operating, Market Makers no longer obliged by Treasury to make prices. Abnormal situation indicating significant technical market issues at play. Talk of prescribed assets to create demand for SA bonds to calm the market and safeguard the fiscus
- Risk perceptions highly elevated, pricing risk in this globally distorted environment is not possible
- USD demand as safe-haven has created a global shortage, which has led to it surging against all currencies globally (essentially a giant “short squeeze”). Central banks are making coordinated efforts to bring this under control as it is exacerbating dislocations across all financial markets
- ZAR losses vs USD are 10% in the past month. All 24 EM currencies are down vs USD with BRL, COP, RUB & MXN suffering greater losses than ZAR. Commodity based economies selling off the most along with commodities. SA’s deficit spending in recent years adds further fuel to ZAR’s fire
- ZAR is deeply oversold per fair value calculations, approaching extreme levels of 30% undervaluation. Previous occurrences of similar levels were 9/11, 2008 financial crisis and “Nenegate” in Dec15. 9/11 reached 45% undervaluation. Whilst there is certainly room for further weakness there is no doubt that South African assets and ZAR represent incredible value at current levels
- The virus will inevitably run its course, vaccine development progressing at the fastest pace on record and treatment methods improving virtually by the day. Be on the lookout for a catalyst that will bring increased calm to the markets and trigger a global recovery, the reversal in SA markets & ZAR will be substantial
- South Africa & ZAR remain fragile, volatility and weakness will stay in the very near term
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