Rand plunges as possible downgrade, global recession fears take their toll

Rand plunges as possible downgrade, global recession fears take their toll

The rand weakened further on Wednesday as jittery investors dumped government bonds and stocks on growing fears of a possible downgrade by Moody’s and poor industrial output data from the US and China that stoked fears of a global recession.

The rand had plunged to R15.41 against the dollar by 5pm from the R15.17 it was bid at at the same time on Tuesday as data emerged that the Chinese industrial output reached its weakest level in 17 years while the US Treasury bond yield curve inverted for the first time in 12 years.

Bianca Botes, treasury partner at Peregrine Treasury Solutions, said anxieties on the world's two biggest economies have triggered renewed fears of a global recession.

“Overall European economic performance remains stagnant, with eurozone quarterly economic growth being confirmed at 0.2 percent in the second quarter of 2019, compared with a 0.4 percent expansion in the previous quarter,” Botes said.

“On top of this, the US treasury yield curve is inverting for the first time since 2007. Together, these factors have lifted negative sentiment and both the JSE and the rand have pulled back from opening levels.”

The market initially expected that a reprieve in the trade dispute between Beijing and Washington would lift investor sentiment towards riskier assets such as  equities. However, Chinese industrial output shocked markets.

Data from the world’s second-biggest economy came in softer than expected, increasing 7.6 percent in July from a year earlier, compared with 9.8 percent in the previous and against markets expectations of an 8.6 percent growth.

News of Chinese troubles saw the FTSE/JSE All Share Index closing the trading session 2.05 percent in the red. The biggest share on the exchange, Naspers, which is heavily exposed to the Chinese market via its stake in Tencent, closed the day 3.96 percent down at R3 354.10.

Adding a gloomy mood was news that foreign investors had dumped more than R14 billion of the country’s government bonds since the start of this month as investors priced in further downgrades on South Africa’s sovereign debt.

Mike van der Westhuizen, portfolio manager at Citadel, said while there have outflows across emerging markets, both debt and equity, South Africa had its own specific overlay.

“The chickens are slowly starting to come to roost in the mind of foreign investors. The SA fiscal situation, mainly from a revenue collection perspective, plus the ongoing ploughing of additional financial support in to Eskom by government, has forced the ratings agencies to become more vocal about further potential downgrades,” Van der Westhuizen said.

“If you look at South Africa's CDS (credit default swop) spreads/risk premiums, they have become, and remain, elevated versus similar-rated peers. The risk premium spiked in July after government announced further Eskom support and an increase in weekly bond issuance. One could argue that much of the bad news is priced in but it seems as if the market is waiting for some kind of catalyst before coming back into SA bonds.”

Moody’s, the only remaining rating agency that still has the country’s sovereign debt above junk, has in recent months displayed its ire over the government’s inability to rein-in debt, particularly in regard to Eskom.

Raymond Parsons, an economist at North West University Business School, said the market was also already pricing in a downgrade to junk status by Moody’s, even though the decision was only expected in November.