VIOLENCE BEGETS VIOLENCE: Weekly Market Wrap - 05/06/2020

By Bianca Botes and Jordan Weir

In recent months, we have seen the US engage China in one of the biggest trade spats of our time. However, the US’ focus on China has now taken a backseat to the country’s internal racial divisions, which have been laid bare over the past few days.

In particular, the issue of racial profiling by law enforcement has been thrust to the forefront of global news by the police killing of George Floyd, stirring racial tensions to new highs and sparking a series of violent protests. As many are drawing parallels between current events and the 1960’s civil rights movement, it seems appropriate to recall the words of Martin Luther King as he once said, “Injustice anywhere is a threat to justice everywhere.”

GLOBAL DATA AND POLITICS

The US police force has long been accused of racial bias and unwarranted brutality towards certain races, and especially African Americans. On top of this, the thousands of deaths and economic fallout caused by Covid-19 have taken a severe toll on the nation’s mood. In recent weeks, the US economy, in line with the rest of the world, has witnessed economic devastation. Now at the highest levels seen since the Great Depression, unemployment has skyrocketed from 3% to 20%, plunging millions of people into financial turmoil, and creating a tinderbox situation.

Then, on Monday 25 May, the death of George Floyd proved to be the final straw. Fears of contracting the coronavirus seemingly evaporated as thousands of Americans took to the streets to protest racial injustices. Unfortunately, these protests quickly turned violent, and images of a country on fire made their way around the globe. Many lives have since been lost and innocent bystanders caught in the crossfire, while livelihoods have been burned to the ground.

With the future of the US hanging in the balance, conspiracy theories are rapidly spreading, with some even accusing the Democrats of funding the riots as an election tactic. Meanwhile, President Trump has been insistent on fighting fire with fire, sending shockwaves through political realms with the statement, “When the looting starts, the shooting starts.”

However, Trump’s aggressive stance seems only to have incited further anger and resentment. And the damage caused by the current riots could very well see the US struggle to regain economic momentum, ultimately resulting in a delay to the global economic rebound. So, with the US national elections around the corner, markets will be watching closely to see who the country will choose to lead them, how long the US economy will take to rebound, and how these events may impact the rest of an already fragile global economy.

Then, turning to Europe and the UK, Brexit talks have reclaimed the spotlight this week. There has been little progress on this front, as German Ambassador Michael Claus explained that the UK will have to give up some of its sovereignty if it wishes to reach a free trade pact with the EU.

With negotiations in a deadlock, there are concerns that unless the UK becomes willing to take a more realistic approach, the talks may extend into October. Failure to reach an agreement by 31 December would mean the return of tariffs and quotas, and the imposition of bureaucratic barriers for businesses. With the prevailing assumption being that the UK will not request an extension of the transition period, an agreement needs to be reached in the next six months to avoid the fallout of a “no-deal” Brexit.

Yet despite growing fears over the situation in the US, the prospects for the global post-pandemic recovery, and rising risk factors such as geopolitical tensions, financial markets have remained largely upbeat. Optimism over economies rebooting, coupled with the enormous amount of cheap money in circulation due to record amounts of stimulus, has fuelled yet another rally in emerging markets and underlying risk assets, seeing safe haven assets come under pressure.

Economic data has been pushed to the back burner for the time being, but will soon enough prove its relevance, especially as most global data shows signs of a steady uptick in economic activity.

US:

? ISM Manufacturing PMI improved to 43.1 points in May, while ISM non-manufacturing PMI improved to 45.4 points

? Total vehicle sales rose to 12.2 million in May, up from the previous 8.6m

? Initial jobless claims also reduced, albeit less than expected, reaching 1.87m

? Payrolls and unemployment numbers are a key release for the US today

CN:

? Caixin manufacturing PMI for May ticked up above the crucial 50-point mark, while services PMI rebounded strongly from previous levels to 55 points

EU:

? Markit manufacturing PMI improved to 39.4 points, while services PMI ticked up to 30.5 points

? Unemployment accelerated to 7.3% in April

? PPI contracted by 4.5% year-on-year in April

? The ECB kept interest rates on hold

UK:

? Markit/CIPS manufacturing PMI recovered to 40.7 points

GLOBAL EQUITIES

The NASDAQ, S&P 500 and Dow Jones all continued to press higher this week, with the NASDAQ closing at historic highs on Wednesday evening, pushing to 9719.203 during the course of the day. The previous high was reached before February’s crash at 9718.727 points. In little over three months, US markets are seemingly back to ‘normality’. Given the unprecedented stimulus being pumped into the market in 2020, this raises the question of whether future market crashes simply be avoided by printing money, and at what point does stimulus undermine the value of money?

Then, just US retailers began to open their doors, violent protests and riots saw millions of businesses across the country being looted. Many vandalized stores have been closed again as a result of damages and theft, exacerbating the financial pressure already being experienced by numerous households as a result of lockdowns. Notably, a similar situation occurred in 1992 in Los Angeles when Rodney King was beaten by police, sparking riots that resulted in property damage and looting amounting to the equivalent of $1.4 billion in today’s terms.

Given the high costs of these protests, insurers are going to be among the worst hit in the short-to-medium term in terms of financials and earnings numbers, as nearly all of the riot damage falls under insurance coverage. So, as a silver-lining for some impacted retailers, looters may in fact have helped clear long-held season-specific fashion items and inventory from their floors, as those retailers with good insurance policies like Apple, Target and higher-end fashion outlets will be paid out handsomely for any losses.

Following the disruption to the retail industry, some investors are also now considering e-commerce and online shopping businesses, stirring some interest in companies such as Amazon as potentially favourable investment options.

In addition to sending two astronauts to the International Space Station on a SpaceX and NASA-operated launch this week, Elon Musk announced that Tesla will be expanding its Tesla Supercharger presence across China by the end of the year by installing 4000 Supercharging stations in order to keep up with expected Chinese growth. Owing to falling vehicle-demand during the recent economic slowdown, Tesla has quietly reduced the entry-level prices for three of its car models as below:

? Tesla’s Model 3, having a $2,000 price cut, now starts at $37,990;

? Tesla’s Model S, now retails at $74,990, down from $79,990; and

? Tesla’s Model X is now at $79,990, down from $84,990.

In recent weeks, the entire air transport industry has come under some serious pressure, with air travel being slashed by up to 70%. However, the boom in online shopping and delivery growth begun during the lockdown has seen Amazon’s air transport arm, Amazon Air, lease 12 Boeing cargo jets from the Air Transport Services Group to assist with its influx of online orders. Amazon Air currently has 80 planes in service worldwide, and the 12 leased planes will be fully operational by the end of 2021. And this turn of events certainly points to the potential of digitalized businesses as a weatherproof investments.

The amount of liquidity being pumped into markets has spurred on a wave of new investors and buying momentum, although the divergence between the way shares are trading and the actual health of the underlying economy should be noted. There will be a day, once the stimulus has run its course, where the price of equities will have to swallow the tough pill of meeting economic activity at lower levels. But equities seem to be ignoring this concern for now, and trading against a rising market should be executed with caution.

Year-to-date, the Dow Jones is now down 7.91%, the NASDAQ up 7.17%, and the S&P 500 down 3.67%.

In South African rand-terms, add 20.57% to each of these return-figures to factor in the currency-effect.

COMMODITIES

Another strong week was seen in the crude oil market this week, with Brent Crude pressing another 5.70% higher to just under $40.00 per barrel. US WTI traded some $3 shy of Brent on Thursday at levels of around $36.81 per barrel.

The stronger move in oil prices was fuelled by Saudi Arabia and Russia’s (OPEC+) agreement to a further one-month extension in oil production cuts to offset the oversupply of oil seen during the market downturn two months ago. Interestingly, the price of oil, and the agreed tapering-off of oil cuts that will be followed for the next year or two, seem to point towards a global economy that will take at least two years to return to full operational ability again.

As it stands, OPEC+’s plans for the next two years are to keep oil production cuts to 9.7 million barrels per day (bpd) until the end of June, with a possible three-month extension on the cards. Oil output cuts will then be eased to 7.7 million bpd from July until the end of 2020. Then from January 2021, oil output cuts will be further eased to 5.8 million barrels per day, and held at those levels until at least May of 2022. However, it’s important not to underestimate Russia or Saudi Arabia’s ability to rattle the oil markets again by not sticking to these intended guidelines.

Brent traded at $40.13 per barrel on Friday morning, while WTI traded at $37.43.

On Thursday afternoon, palladium fell through a technical support level of around $1900 per fine ounce, falling around 5.9% on no material news, while gold and platinum each dipped around 1%. Precious metals spent the week trading in a sideways fashion, as the world continues to make sense of the pandemic, social unrest in the US, rising tensions between China and India, and the issue of mainland China moving in on Hong Kong.

Current levels will likely hold relatively well in the coming week, but the $1700 level for gold, $1900 for palladium, and $825 level for platinum are to be watched extremely closely, as all three metals seem to be testing these markers in preparation for a small step lower in the near future. With the amount of stimulus being injected into the global economy, equities will remain one of the more favoured asset classes, while underlying precious metals temporarily take a back seat.

On Friday morning, gold traded at $1,708.90, platinum at $837.43, and palladium at $1,940.90.00 an ounce.

SOUTH AFRICAN FUNDAMENTALS

Following an open letter from News 24 editor Adriaan Basson, which questioned why President Ramaphosa has not opened himself up to questions from the media since the declaration of the national state of disaster, Ramaphosa finally broke his media silence on Sunday, taking questions from top local editors. Questions raised ranged from the contradictory regulations witnessed throughout the various levels of the lockdown, to whether political factionalism is rife within the ruling party and the National Command Council (NCC).

The president also made waves by stating that scientific advisors counselled the NCC to take the country down to level one, but the NCC instead opted to take a more staggered approach, in line with the World Health Organizations guidelines. This has contributed to the impression that government is indeed disregarding the evidence and advice presented to them by expert advisors.

And as the number of days spent in lockdown grows, so does the amount of litigation against government challenging various sections of the regulations, including the contentious cigarette ban and even the regulations as a whole. A judgement from the High Court then ruled against the government this week, stating that the regulations under lockdown level 4 and 3 infringed on the Bill of Rights as set out in the Constitution, drawing widespread relief. While the ruling party announced that it will be appealing the judgement, and will also be extending the state of disaster by another month, the judgment went a long way to restoring faith in our constitution and democracy.

Meanwhile, the EFF called on the nation to defy the move to level 3 and to stay home, whilst promoting lectures of Marxist economic theory on its social media platforms. However, these calls fell on deaf ears, as South Africans eagerly grabbed at the opportunity to return to work and safeguard their livelihoods.

It has been a spectacular week for the rand, which has broken below R17/$. Improved risk appetite and the subsequent selloff of safe-haven assets saw the dollar dip to a seven-week low, bolstering the local currency.

There was another glimmer of hope in local data this week, as the Absa manufacturing PMI broke above 50 points in May, while total vehicle sales also regained momentum following the shutdown of the vehicle industry during lockdown. The Standard Bank PMI, however, contracted to 32.5 points.

SOUTH AFRICAN EQUITIES

South Africa has been thrown a number of curveballs over the past few months, and as we head into the sixth month of 2020, it’s worth reflecting back on the turbulence that we have survived so far this year, particularly focussing on the JSE All Share Index (ALSI):

? The overall 2020 crash experienced in February/March saw a nearly 35% drop to the bottom

? Since 19 March, the bottom of crash, the ALSI is now up 42.71%

? The JSE is still hovering 8.73% below the 21 Feb 2020 from which it fell

? Between 1 April 2020 to 1 May 2020, the ALSI recovered 15.21%

? Between 1 May 2020 to 1 June 2020, the ALSI did around 1.09%

? Since the beginning of crash, the ZAR has lost nearly 27% against USD

? We are currently around 10.80% off from where we were against the USD at end of February

? Year-to-date, the ZAR has lost around 21.72% against the USD

This week saw the ALSI gain around 5.20%, largely on the back of US dollar weakness resulting from the George Floyd protests. Negative media attention on the US’ social unrest saw emerging market economies gaining favour with investors this week. Both Tuesday and Wednesday saw above-average volumes being traded through the ALSI.

Tuesday’s bullish market moves were largely seen in the property, hotel/gaming and industrial sectors, with one or two surprises seen in telecoms and resources. Some of the day’s most noteworthy moves included:

? Sun International – up 54.6%

? Tsogo Sun Hotels – up 14.71%

? Tsogo Sun Gaming – up 60%

? City Lodge – up 11.5%

? Sasol – up 16.30%

? Telkom – up 14%

Sasol’s move was more of a technical nature, as investors and traders focussed on the gap between R104.00 and R154.00. During Sasol’s incredible fall from around R200 per share, the move between R154.00 and R104.00 was not supported by any previous technical levels. This ultimately led many into thinking that the ‘gap-fill’ between R104.00 and R154.00 could be just as aggressive a rise as it was a fall. Sasol then worked its way up to R136.00 per share on Wednesday, climbing drastically from the R89.00 level on Monday. But after summiting on Wednesday morning, Sasol’s share price pulled back to R120.00, where a support level seems to have been formed.

Reinet announced last Friday that R21 billion of its net asset value (NAV) has been wiped out due to lockdown measures for the six months ending 31 March 2020, although it’s important to take into account that these numbers were reported at the end of March, which was roughly at the bottom of the Covid-19 equity market crash. At this point, British American Tobacco’s (BAT) share price had dropped almost 24% from the levels seen just before the global equity market crash, which definitely played a role in Reinet’s numbers, as BAT makes up roughly 40% of Reinet’s NAV.

Reinet’s share price has since recovered, but it’s highly likely that financial numbers reported for the next period (from April onwards) will see the actual underlying impact of tobacco bans creeping into the financial statements.

Along with BAT, Reinet pointed out that its UK financial services business, Pension Insurance Corporation, has also battled during the lockdown period.

Reinet’s results did come in slightly worse than expected, but this was generally expected considering the current economic environment. The company is still looking to potentially declare a dividend after its AGM, which should particularly satisfy its shareholders given the number of companies withholding dividends during this period.

The share price presented great opportunities for traders on the day, with healthy volatility being shown. Trading within a 2% range since open prices, the market does not appear to have been too disappointed with the results at all.

Remgro saw its share price dropping over 22% on Wednesday, as the proceedings of RMB Holdings unbundling get under way. Wednesday’s drastic fall was mainly driven by shareholders processing the unbundling of RMB Holdings (RMH) from Remgro. The movement in the share price reflected “ex” entitlement to receive the unbundled RMH shares, and having stripped out the impact of the unbundling, Remgro’s share price then rebounded, and was up over 3% by lunchtime.

Imperial Logistics shared some updates this week which were not all that positive. During the lockdown period, the company has managed to hold onto around 80% of their contracts, while around 20% have been lost to competitors with better pricing. Some 70% of the business is operational under level 3 of the lockdown, up from 55% in late March. Revenue was up partially, while operating profits were expected to come in over 20% lower than the previous corresponding period. Major negative impact during the lockdown has been felt by its logistics divisions which supply alcohol and tobacco, although the company seems more positive as we come out of lockdown restrictions.

Alongside the many other companies trying to navigate these rocky times, Imperial will be reviewing its August dividend, while cost-cutting measures are already under way with the sale of its EU and South American shipping arms. Overall, the company isn’t in a distressed space, and is still holding ample liquidity to manage its way through the lockdown.

Year-to-date, the JSE ALSI is down 6.8%, and the Top 40 down 3.89%. Sector-wise, industrials are now up 4.53% for the year, resources down 0.83%, and financials down 30.1% for the 2020 year so far.

LOOKING AHEAD

Ongoing tensions in the US will play a critical role in dollar performance, which in turn will affect all other currencies, including the rand. Current exchange rates are relatively attractive for exchanging your hard-earned rands into foreign currency.

Unemployment numbers due for release next week are guaranteed to cause a stir, with expectations currently set at 35%. And while markets are largely driven by global events, this number may cause some commotion in the local environment.

Additionally, we will be keeping a close eye on the local government for any information regarding its appeal of the recent High Court judgement, although this process could potentially drag on for weeks, if not months.

We will also be watching for the following data releases in the week ahead:

Monday:

? US inflation expectations

Tuesday:

? EU GDP

? Local unemployment

? US JOLTs job openings

Wednesday:

? CN inflation and PPI

? US inflation

? Fed interest rate decision

Thursday:

? Local gold, mining and manufacturing production

? US jobless claims and PPI

Friday:

? UK GDP

? EU industrial production

? US imports and exports

? CN vehicle sales and FDI

The rand started the day at R16.90/$, R19.15/€ and R21.27/￡.