US & China tensions rise as Rand trades sideways...

Well, after the last few months that we have had, this week was one of the most welcome breathers we have had in recent times!

The Rand largely traded sideways, giving some time to catch our breath and take stock of where we are at.

The bad news continues to roll in, but markets have been unusually stable...

...so this is not a time to be complacent.

It is a time to get clear, objective thinking, as we look ahead into the coming weeks and months ahead.

So let's start with our review of this last week, which is largely South Africa focused, and then we will look ahead to the future...

Firstly, here were the biggest headlines from the 5 days that we saw:

• US & China tensions increase - the tensions are back with a vengeance, only going far deeper now as the US continues to blame China for their actions around Covid-19, which is creating global uncertainty, as well as denouncing its actions in respect of Hong Kong and more.
• SARB running out of room - what can the Reserve Bank do next to try and stimulate the economy?
• SA bank risks - as the debt burden continues to be such a worry worldwide, SARB put out a warning as to South African banks...
• Investment Grade Ratings - S&P came out with 2020 economic predictions and investment ratings, showing a dire picture globally as well as locally...

So at the start of the week, we saw the Rand gently ease its way in, opening around R17.60 to the Dollar, after a fantastic previous week in which we saw gains of 90c or more.

But after touching R17.73 in Monday's trade, we saw the market strengthen for the majority of the week.

Once again, economists had their different reasons for this...

Such as Fin24's article "Rand strengthens thanks to lockdown easing globally"…

...it is really easy to take a retrospective - otherwise known as "after-the-fact" view.

That is what we as humans do. We want to know why something has happened, and want to rationalize why something has happened by using an event.

Well, take a guess what the headlines would have said had the Rand lost value?

"Rand loses value as Standard & Poors paints bleak economic picture"

Which is exactly what S&P did do, if you see this other article from Bloomberg.

But because the Rand strengthened, the obvious solution to rationalize the move with some positive news.

When we start to read economic news like this, we start to see how 99% of what we read is just noise...

And so we learn to read the news with caution, particularly when it comes to financial markets. The noise drowns out the real signs which show where a market is in its cycles, and distracts us from focusing on the patterns.

To show an example, here was our Near Term (next few weeks) forecast from Friday the 17th of April (so around 1.5 months ago) when the Rand was back at 18.82 to the Dollar:

You can click to enlarge the forecast, and what you will see is how we showed sentiment at an extreme with the Rand due to top out shortly. Over the coming weeks, that was exactly what we saw...

And while no system is perfect, this just shows the power of the Elliott Wave Principle to be able to predict changes in sentiment before they even happen - even when rational logic says otherwise!

And then in other news:

• With the number of interest rate cuts that there have been so far this year, SARB is starting to run out of room to maneuver the economy locally. There is only so much space that they have to decrease rates before it starts to do more damage than good.
• Finally, from today (June 1) we will see Level 3 lockdown restrictions be implemented allowing many more persons to go back to work and some normality to resume across South Africa. It is now that we start to see the reality of the damage that has been done in the weeks of lockdown.
• SARB issued a warning this last week that sent chills through the financial sector. While it is fairly obvious, it is no small thing for the Reserve Bank to announce that "SA Banks are not immune to collapsing" - showing us just how seriously SARB is taking the current situation and its long term effects.
• They also announced that the SA financial system is under stress and headed for extraordinary shocks over the coming days. This is to be expected, because of how much banks rely on assets - and the stability of asset prices. Covid-19 has thrown a tremendous spanner in the words here, because suddenly assets that were solid in February are not solid today, and not many global events could have changed the landscape so fast. It catches banks unaware, and suddenly the debt bubble nears bursting point...!
• US and China tensions raised up to an all time high during this last week following the proposed law that would increase China's hold on Hong Kong, violating promises made in this respect. Secretary of State announced that the US now classifies Hong Kong as no longer being an autonomous state, and under the control of China.

As for the Rand, trade was mostly quite muted through the week, even as these tensions between the US and China simmered...

We saw a test as low as R17.29 on Thursday, before the market pushed higher again to close South African end of day trade over R17.60 before retracing slightly, as all awaited news of how Trump would treat China's latest actions.

And then came the bombshell...

Late on Friday, President Trump came out all guns blazing on both China and the World Health Organization, revoking the special trade status of Hong Kong, and announcing that they will be terminating their relationship with the WHO.

Along with this will be investigations into Chinese companies listed on the US Stock Exchange, and much more...

...we will have to wait for China's reaction to this, and what moves in the market it will trigger.

And what was the wrap, as we look ahead toward another interesting week...!

As we look to the week ahead, there a stack of events over the 5 days, with some of the major ones being:

• SA - Current Account Q1
• US - Trade Balance, Manufacturing figures, Jobless claims, Unemployment Rate, Non-Farm Payrolls and more...
• UK & EU - Unemployment figures, ECB Interest/Deposit Rate Decision & Monetary Policy Statement

And of course, more from that, everyone's eyes will be on the implications of President Trump's announcement on Friday - and its effect on the markets.

For us, we will simply again be watching what the price action in the markets is telling us (based on the evolving patterns), to give us an idea of where we are headed.

We are watching some key price levels over the next week or so to confirm which of the potential scenarios are playing out..

...and we suggest you do the same.

To get a look at what charts we are looking at and using to give direction, use the link below to get access to the latest forecast. No charge. All yours for 14 days.

(You don't want to regret not having done so this time next week...)

Look forward to hearing from you.

To your success~

James Paynter