And like January was all just a dream, we have suddenly come back down to earth in February...with a bump!
What a disastrous few days for the Rand.
Between Eskom, load shedding, Moody's and more, it did not make for a happy Valentine's day for the Rand, as the crash above R14 to the Dollar hit.
While markets are moved by sentiment, it is impossible to disconnect them from the events that happen in politics, economics and more - and this Eskom debacle has certainly been the trigger for a change in underlying sentiment.
Well, let's review the finer details...and then look at where we see things going from here.
Well, where to start...
The big events were aplenty this week:
- Load shedding - the pinch of Eskom's disastrous position was being felt in reality, as the crunch well and truly hit the nation as a whole...
- Ramaphosa in a corner - for perhaps the first time in his presidency, Ramaphosa too was feeling the pinch, as pressure mounted from different angles. What answers does he have?
- Moody's warning - while it did not come from Moody's themselves, there are warning signs that there will be the final nail in the coffin downgrade from Moody's, should the government take on Eskom's debt
- US-China talks - the ebb and flow of this discussion is quite frustrating, as we still have no clear pathway to a resolution...
I am sure everyone has pretty much heard enough about Eskom by now...but here is the long and the short of it:
- Up to Stage 4 Load Shedding hitting certain parts of the country through the week, completely disrupting the workforce, manufacturing, traffic flow and more
- A seemingly confused, as well as "shocked and angry" Ramaphosa, was not at all impressed with how this had suddenly happened. Either he is holding his cards close to his chest after the seemingly better position Eskom was meant to be in, or he really was not briefed on this sudden supply collapse.
- Gordhan warned of more issues, saying a cash bailout is the only way to save Eskom from collapse. If this does not arrive by April, then the R440bn+ debt which is being carried will break the camel's back...
- Moody's weighed in, saying that the splitting of Eskom helps transparency, but in effect they said: "What about the R440bn debt?!". The transparency does not help the financials, and that is the current issue.
- For now, it is unclear how much longer the load shedding will continue. For everyone, it is a case of "grin and bear it" because there is very little that can be done. But especially for those in manufacturing, this is extremely difficult to manage, if not crippling.
What is most worrying is the lack of clear communication, control and accountability from Ramaphosa.
The fact of the matter is this has been a disaster in the making - through gross incompetence and rampant corruption by Zuma and his cronies - and something Ramaphosa surely knew about for a long time. As the Daily Maverick put it bluntly: Eskom - a terrorist attack from within.
Business and investor confidence has taken a serious knock - and the outlook remains pretty bleak.
The Rand did not take any confidence from this either...
The level of R14/$ does not carry any weight really, when it comes to technical analysis...
...but the impact for many persons was noticeable. A wave of disappointment hit with the market going through this level again, just when it looked like we may be heading to break R13/$.
Then there was the global outlook, which included the US-China talks - which didn't seem to be going down all that well. To make matters worse, the deadline of March 1 is looming...
...while Trump has described the talks as progressing "very well", there are no results to show for this.
The gridlock remains as the deadline rushes toward us.
Just another important date to watch out for this month, in amongst the horde of local events.
There was much more in the headlines too:
- Moody's Investor Services appears to be breathing down the neck of South Africa's credit rating once again... The predictions are that junk status is coming unless something significant happens to change the course of the current Eskom situation, as well as the tax collection issues. Moody's themselves commented on Ramaphosa's SONA, saying that the plans were great, but how were they going to happen? One thing is for sure, Tito Mboweni's Budget Speech is going to be a crucial one in detailing how the nuts and bolts of this Eskom reform is going to happen.
- On the subject of tax collection issues, there are warnings that the tax revenue could miss the target set at the Mini-Budget by more than R10bn... an amount which SARS just cannot afford to miss out on. Both personal and corporate tax has slowed significantly in the last few months of 2018. With SARS struggling to keep the lights on as it is, this is just another worry for Mboweni to try tackle.
- And this all lead up to what we saw in the latter half of the week, with President Ramaphosa getting himself into rather a corner. "Where were you Mr. President?" were the calls from the opposition MPs... Ramaphosa's apparent surprise and shock at the sudden drastic load shedding did not give confidence to anyone in his control of the situation. The commander in chief needs to steady the ship - but he cannot do that if he does not even know that the small hole in the bottom of the boat is not actually so small, and the ship will sink in a matter of minutes if he doesn't take action...
- SA data came out during the week, with manufacturing data released at just 0.1% for December with the unemployment rate consolidating to at 27.1%. In other news, SARB announced that they had no immediate plans to change their inflation target range of 3-6% - this figure may be tough to maintain should the petrol price continue to increase (expected to do so in March), and the Eskom price hike goes ahead...
- Over in the UK, Theresa May continued to try fight what seems like a lone battle, as she continued to endure defeat after defeat. The confidence in her leadership was dwindling by the minute, and yet she continues to choose to keep battling on. It seems that there is not going to be any result on this until the 11th hour... a big event to watch for the GBP and EUR!
- On the US side of the pond, Donald Trump continued to fight for his border wall, and threatened to shutdown the government again to make it happen. However, on Friday, he came out and announced that he would be signing a national emergency to get the border wall built...! This is a drastic decision but seemingly the only thing possible to do, in order to achieve the funding required. It will be interesting to watch the effect on the Dollar, as it has been a fantastic February so far for the Dollar Index (DXY), with a massive recovery coming following the US government reopening:
As for the Rand, it recovered slightly to end the week around R14.05/$... a very tough few days, but at least some respite after hitting R14.27 on Thursday...
The Week Ahead (18-22 Feb 2019)
The week ahead has some important local and international events, with the most important being the Budget speech by Tito Mboweni on Wednesday
How he plans to solve the situation with a bankrupt and crumbling Eskom will be closely watched by cosnumers, business, investors - and Moody's, The taking on of Eskom debt will surely be the final nail in the coffin for junk status...
Some medium impact events from the US, with Durable Goods and FOMC minutes.
And then we have the US National Emergency on Border Security, pitting Trump and the Republicans against the Democrats, who seem hell-bent on not letting Trump succeed on his promises - even if Americans suffer as a consequence...
But, once again, we won't be looking to the events themselves to give us direction, but analyzing the patterns of sentiment to give us - and our clients with Rand exposures - a clue as to where the market is likely to head in the short, medium and long term.
So if you have some exposures, please join us today and give our free trial a shot.
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