This last week was the final trial of February for the Rand, after getting through the State of the Nation address relatively unscathed.
Now it was turn of the Budget for 2021.
And it didn't really go as well as many hoped.
Volatility and volume came seemingly out of nowhere on Thursday, as we saw a massive turnaround for the ZAR.
We had been waiting (and calling) this for some time...but it still caught so many by surprise, just as things seemed to be getting rosier?
Why does it feel like our emotions are ALWAYS giving us the wrong signals?
Let's take a deeper dive into Budget 2021 and how the markets are triggered by events like this...
First things first, here were some of the biggest headlines from the 5 days:
- Tito's budget - the finance minister once again tried to navigate the different difficulties of the South African budget...
- Rand crumbles - a more than 60c selloff just on Thursday sent shockwaves through the market...where to next for the Rand?
- Stocks take a hit - right on cue, the US stock market had its correction with the Dow dropping more than 500 points amidst surging yields
- UK recovery begins - with vaccinations taking place at a rate of knots, Boris Johnson was looking towards some form of normality being restored...
So, with the Rand having survived the SONA largely unharmed, it was now onto the next big one...
As the week began, all eyes were already on Mboweni's speech.
And for good reason, he had a long list of troubles to address:
- Vaccination program: A successful rollout being 'the key' to growth.
- Economic recovery: Government will support the economic recovery by extending short-term economic support and undertaking reforms to lower the cost of doing business.
- Economic growth: Capital expenditure is the fastest growing budget item in a move towards an investment-led economy over the long term.
- Debt: Converting shorter term debt into longer term debt through the creation of government bonds and reduce the budget deficit.
- Eskom: Stabilising electricity supply to support industries in the private sector.
As for the Rand approaching his speech on Wednesday, it endured a few choppy waters on Monday, trading over R14.90, but by the time the speech rolled around, we were testing R14.50, and even below R14.40 during the afternoon!
So it would seem all was good...
Mboweni covered a whole bunch of points, and here were a few of them:
- Government will not raise any additional tax revenue from direct tax
- Personal income tax payers to receive relief as brackets will increase by 5%
- Corporate income tax will be reduced in the medium term
- Expected revenue of R1.36 trillion (27% of GDP) versus R2.05 trillion expenditure (41% of GDP).
- Real GDP to growth estimated at -7.2% in 2020, 3.3% in 2021 and 1.6% in 2022
- Gross debt has increased from 65.6 per cent to 80.3 per cent of GDP for the year 2020/21.
- The proposed fiscal framework will stabilise debt at 88.9 per cent of GDP in 2025/26.
- Government has set aside R9bn for SA’s roll-out
- The public wage bill reduction is on track to hit nearly R150bn in the medium term
- Major changes to Exchange Control proposed last year are still on the cards for 2021, although no clarity has been provided.
- Excise duties on alcohol and tobacco will increase by 8% to discourage consumption and promote good health
- Increase in fuel levy by 26c per litre
- VAT remains unchanged at 15%
Overall, it was another non-commital budget. Some good ideas, some elaborate ideas, some incomplete or severely lacking ideas...
...and as always, the stigma hanging over every promise, as none of Mboweni's budget have yet gone according to plan.
But at least the Rand took it well...right?
But by Thursday, the tables had TOTALLY turned:
From trading sub R14.50 in the morning, to hitting more than R15.10 in the evening!
How does this happen? Why does the market move like this? Was the budget that bad, for the Rand to weaken so much?
These are questions that swirl around for investors after moves like these.
But the key factor here is to remember that markets are NOT moved by events - they merely are potential triggers for moves, and are not direction-givers.
We see this time and time again, as markets react TOTALLY differently to how we expect when an event happens. That is because the underlying emotion in the markets at that time.
And the Rand had been at a point of reaching a positive extreme, which meant a weakening cycle was imminent.
A key example of this just a few weeks ago was the Gamestop stock - mass human sentiment (along with some coordination) saw the stock fly higher and higher for no reason.
Only for the sentiment to reach an extreme (no one left to turn positive), and then the market dumped severely, now trading at $120 from its highs of $483, after going back down to sub $30 levels.
Markets will always be irrational...we just have to see that they are irrationally PREDICTABLE, like us humans.
Don't believe us?
Well, here was our forecast on Wednesday evening, before Thursday's trade even began:
We saw the Rand at R14.49, having traded lower - but our prediction was for the market to bottom out soon between R14.50-14.11, and to move higher quickly to break up and above of R14.7474, which would confirm a move further up, toward R15 and above. (see below - click to enlarge)
It seems impossible to trace these moves, but our Elliott Wave based forecasting system helps us to make those predictions, just like these, by tracking human emotion in the markets.
And then in other news:
- Over in the UK, there appears to be light at the end of the tunnel, as PM Johnson announced the country’s path to easing of lockdown restrictions over the next few months. With over 16.5 million people having received their first dose, there are improving prospects that restrictions could be lifted sooner than expected.
- And in the US, stocks also took a hit on Thursday with the Dow dropping more than 500 points. This came as the yield rates rose, with 10 year yields coming back over 1.5%. While this was proceeding, Congress started moving forward with Biden's massive $1.9 trillion stimulus package. The House was pretty much a given to approve this, but it would then move to the Senate, where Democrats are preparing for another arm wrestle, and with the budget reconciliation are trying to make sure that Republicans are unable to stop the bill passing.
And then when it came to Friday, the Rand's volatility continued...
We broke down to touch R14.80, before the market again rebounded higher, ending the week well over R15, even testing R15.20!
What a week it had been, with a more than 80c swing in the Rand's value!
And it had all come just as per our forecast, leaving the the Rand to lick its wounds, losing all the ground it had gained in February.
The Week Ahead (1-5 March 2021)
As we enter into March (yes, we are in March already), there are several economic events that could provide potential triggers, with Nonfarm Payrolls being the big one to watch:
- USA - Jobless claims, Nonfarm Payrolls, Trade Balance
- UK & EU - Consumer Price Index, Retail Sales
Of course, there is plenty else from an financial, social and political point of view that could provide extra potential triggers.
But then, markets don't specially need any trigger to have a move (some of the biggest crashes in markets can be traced back to no particular news at all).
But again, we can expect plenty volatility.
As for the Rand, it is likely to extend its losses short term, but we will be continuing to watch some key levels in our larger degree wave patterns (based on our Elliott Wave based forecasting system) to confirm direction for the weeks and months ahead.
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Look forward to hearing from you.
To your success~