ECONOMIC WEEK AHEAD: How markets digest Moody’s downgrade and Covid-19 to frame the week ahead
Though some have argued that the downgrade was priced in, it comes as global and local markets experience volatility on coronavirus fears
Monday begins the first full week of the 21-day lockdown aimed at curbing the spread of the coronavirus. To add to the economic fallout, SA was downgraded to junk status by Moody’s Investors Services on Friday night.
Though some market participants have argued that the downgrade has been priced in, it comes as global and local markets experience extreme volatility in the wake of the viral outbreak. Finance minister Tito Mboweni’s reaction to the downgrade gives an ominous indication that more pain may be in store for the country, when markets open.
“The sovereign downgrade will further add to the prevailing financial market stress,” he said. “While some market participants argue that the impact of a sovereign downgrade has already been priced in, it is difficult to stipulate with certainty the extent.”
With the downgrade, SA will now be excluded from important indices such as the FTSE World Government Bond Index (WGBI) — tracked by global institutional investors. Earlier in March FTSE Russell announced that the rebalancing of the index has been postponed until the end of April given the volatility in the market.
Though the rebalancing of the index has been postponed, a sell-off in the region of $11bn is expected, said Bianca Botes, treasury partner at Peregrine Treasury Solutions, in a note. The currency, she said, will “in all likelihood” breach R18 to the US dollar after the Moody’s decision.
On the data front, the lockdown will have implications for scheduled releases from Stats SA with the agency warning last week that data collection for both economic and household surveys will not take place during the period. Changes to its scheduled publication dates have been put in place from Wednesday, the beginning of April with several economic publications due later in the month, such as mining, manufacturing and retail statistics now delayed till May.
Stats SA has committed to “communicating any data quality issues as they arise”
The quarterly employment survey for the fourth quarter of 2019 will be published on Tuesday as scheduled. Measuring formal sector and non-farm jobs the survey showed a 0.3% quarter-on-quarter decline in the third quarter of 2019.
Given that the economy slipped into a recession in the last three months of the year — contracting by 1.4% — employment is likely to have fallen in the final quarter of the year, said FNB in a note.
Other data expected this week include February’s private sector credit extension figures, out on Monday, trade balance data for February on Tuesday, and the Absa Purchasing Managers’ index (PMI) for March, released on Wednesday, along with March vehicles sales numbers.
On the balance of trade FNB said it is expecting a surplus in February due to an expected decline in imports as a result of Covid-19-related disruptions in China, which accounts for roughly one fifth of SA’s imports.
The Absa PMI measuring business conditions in the manufacturing sector recorded its lowest level since 2009 during February. The March release is expected to remain dismal, said FNB, as Covid-19 related global supply chain disruptions inhibit the ability of manufacturers to source materials. This is worsened by lacklustre domestic demand, the bank said.
Silver linings to scour for this week include a reduction in fuel prices starting on Wednesday — with that for 95 unleaded petrol set to fall by R1.88/litre.
The latest petrol price decline will provide a welcome boost to households and the business sector, once the Covid-19 lockdown ends, said Stanlib chief economist Kevin Lings, and will help keep inflation lower.
Meanwhile, Eskom also announced that it does not expect any load-shedding during the lockdown period, as demand for electricity has declined by 7,500MW.