Rand faces more pressure as political risk spikes in Europe
The rand may now come under more pressure after yet another spike in political risk in Europe, where banks have in recent years been recovering from financial crises.
This means investors will probably be looking even more critically at emerging market equities in coming months, with the JSE already under pressure from a rising dollar and expectations of global synchronised monetary policy tightening.
On Wednesday, the JSE failed to capitalise on a global relief rally, despite the rand bouncing back from a sharp sell-off on Tuesday, when risk aversion swept through the market due to uncertainty in the eurozone.
Fears have grown that Italy will opt to ditch the euro after attempts to form a coalition government in that country failed on Monday, once again putting the fragility of the bloc’s currency in focus.
The Italian issue had been a contributing factor in a rally in the US dollar and a rise in US treasury yields over the past month, leading to increased appeal for developed market currencies at the expense of the rand, said IG SA analyst Shaun Murison.
While the weaker rand had provided some impetus for local stocks that derived most of their earnings offshore, this was not the case at present, as investors erred on the side of caution, Murison said.
Following strong growth in much of the first half of 2018, emerging markets have recently seen a mass reversal of capital flows. The investment sell-off is being largely attributed to geopolitics, said Schroders analyst Craig Botham.
As of Friday, foreign investors have bought a net R16bn in equities in 2018, but this is R54bn less than in the same period last year.
However, European markets and emerging market currencies recovered on Wednesday.
Earlier in the day, an Italian bond auction had been oversubscribed, helping to soothe investor fears of fragility in one of the largest international bond markets, said Vasilis Girasis, a trader at BP Bernstein.
The euro, however, continued to suffer two distinct economic forces within the eurozone, where member countries were growing at different rates, said Girasis.
Despite the global equity recovery, on the day local market heavyweight Naspers was lower, probably giving the local bourse direction, he said.
The euro also found some support on Wednesday from comments by a European Central Bank policy maker that the bank may begin reducing its bond-repurchasing programme in June — something that should put additional pressure on SA’s bonds. Some market observers had even begun making comparisons between the current emerging market turmoil and the crises that emerged in the 1980s and 1990s, said Capital Economics Analysts.
However, those events had their roots in external financing vulnerabilities, and most countries, including SA, were in better fiscal positions now.
SA followed Venezuela, Turkey, Argentina and Ukraine in terms of external funding vulnerabilities, which was a key reason the Reserve Bank would keep monetary policy relatively tight in the next six to 12 months, the analysts said.