SA’s battered markets got a boost on Tuesday, with the JSE posting its biggest gain since 1997, as global markets staged a relief rally in the hope that US politicians will finally agree on a stimulus package.
While SA was bracing itself for a three-week lockdown — which will practically put on hold an economy that was already on its knees before the coronavirus outbreak — upbeat sentiment was driven by distant events.
Bloomberg reported that the S&P 500 rebounded from the lowest level since 2016, notching a third consecutive Tuesday turnaround — and the biggest one-day gain since October 2008 — after starting the week with a rout.
US President Donald Trump’s administration reached a deal with Senate Democrats and Republicans on a historic package to combat the fallout of the virus. Senate majority leader Mitch McConnell said the legislation will be passed later on Wednesday, Bloomberg reported.
On Tuesday, SA government bonds, which have showed the most obvious signs of stress as 10-year yields surged into double digits, hardly moved though the relentless selling at least slowed.
“A lot of the recovery on the market has to do with the ideas of stimulus,” said Sanlam Private Wealth portfolio manager Nick Kunze. “The JSE was very oversold coming into this week. Some of the shares are down 50% to 60% year to date, so there was definitely an element of people thinking that the sell-off is overdone.”
At 6.05pm, the rand was up 1.1% at R17.6348/$, its biggest gain since March 13. On Monday it was R17.90/$, just 2c short of the intraday record low it hit in 2016, but the currency is still down more than a fifth since end-2019. Yields on generic 10-year bonds, a key measure of investor perception of the government’s ability to repay its debt, were at 12.38%, from 9.1% at the end of February.
Yields, which move in the opposite direction to price, are likely to remain under pressure ahead of Moody’s Investors Service review of SA’s credit rating. The Covid-19 outbreak, which the Reserve Bank said would push the economy into a contraction in 2020, will make it even harder for the government to get its debt under control as revenue collection targets are missed by bigger margins.
Economists have said that the deteriorating fiscal outlook made it more likely that Moody’s, the only ratings agency that has SA on investment grade, will downgrade the country, which could see billions of rand being pulled from the country’s bond markets.
“In the event of Moody’s joining Standard & Poor and Fitch in also downgrading SA to sublevel investment, it would trigger putting the economy into universal junk status, with various unwelcome economic consequences,” North West University business school professor Raymond Parsons said on Monday, after President Cyril Ramaphosa announced the lockdown.
Stocks in Europe also gained, though investors warned that it was too early to say this marked a turnaround, with the global economy set for its deepest slump since at least 2009.
The JSE was up 7.5% on Tuesday, cutting its 2020 drop to 28%, equivalent to a loss of R4.4 trillion for investors. It was hard to tell if the recovery would be sustained, Kunze said. “At the moment, the idea is to try to handle risk accordingly, to just be patient and see how everything pans out.”
With Lindiwe Tsobo
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