KANSAS CITY SHUFFLE
A term coined by Bruce Willis in the movie “Lucky Number Slevin” which basically alludes to a planned misdirection. Getting everyone to look left when they are supposed to be looking right. Whoever is actually in charge of the political play that is unfolding in front of us obviously has been watching some TV in their spare time.
Most South Africans are very worked up about the unfolding of the Constitutional Court’s ruling against our President Jacob Zuma and what has transpired after that. I will agree the whole ordeal is bit of a circus. In fact to actually be witnessing what has transpired is beyond comprehension.
Alas our attention should be on the topic at hand. There is a far more important issue we should ALL be focusing our undivided attention on. The current scrutiny we are under from the ratings agencies. The writing has been just about on the wall post the Nene saga of December 2015. We have managed to keep the agencies at bay with promises of a stricter budget and some structural economic reform. All of which would potentially be possible if South Africans were all pulling together. Yet we seem more divided than ever in our internal debate on whether or not our President should be the one in charge or not.
The ANC has intentionally or unintentionally managed to pull off the “Kansas City Shuffle”. We are all looking left when we should collectively be looking right. Right at the downgrade issue at hand. In fact the Reserve Bank mentioned this week that if we were to in fact be downgraded we would face something to the tune of 80 basis points of rate hikes in a very short period of time. This is over and above all the hikes we have already had to endure of the past 18-odd months.
Many economists assume the market is efficient and many fixed income specialists tell us that we already priced at junk status as far credit spreads are concerned. This means that if in fact we are downgraded it should not make much of a dent in our exchange rate or cost of borrowing as we are already priced as if this is the case.
A part of me would like to believe that, but a warning shot by the Reserve Bank leaves me a little nervous about what might happen if we are downgraded. Our already fragile consumer, the very same consumer that has propped up our market for so long cannot carry the burden any longer. The current precipitous drop in car sales is a great indicator of how negative consumer sentiment has become, and if not sentiment then certainly affordability. The consumer’s pocket is getting attacked from all angles and will capitulate if it does not get some respite. 80 more basis points of interest rate hikes will certainly not deliver that respite.
The only parties that are not as focused on the current Zuma saga and his failed impeachment are the ratings agencies. What they see is a government that is beginning to look fractured internally and under direct siege from the opposition parties and a floundering economy. It would be safe to assume that the political infighting and turmoil is sapping all of the efforts of all parties involved. The ruling party cannot muster the energy or resources to defend itself on two fronts. The one front that really counts for all South Africans is the economic engine we all rely on. If the engine is not running it does not really matter who is in charge.
The ANC was tasked by rating agencies this year to put a few replacement parts in the South African economic engine. Instead the engine is sitting in the workshop and all the mechanics are fighting about who will be the chief executive of the workshop company.
That’s verging on a few too many metaphors but I hope the point has been made. I also hope that this misdirection has been unintentional and that Mr Gordhan and his cronies have the resolve to tackle to problem head on and forget what is happening around them. The calls for unity at this time for all of our sakes were sounded earlier this year, and the time is now before it is too late.
Look right instead of left because if you don’t, you will not get a chance to look left again
The ALSI lost 1.43% last week and the Top 40 Index closed the week 1.86% lower. The INDI added to weekly losses closing 2.06% lower for the week. Financials were the only sector to close in the green, albeit a slight 0.98% upward movement. Resources continued their decline closing the week 3.23% lower. Stocks in this sector experienced a deep selloff with the ‘silent easing’ of Janet Yellen mentioned last week filtering though the markets. Local data released last week we in line with expectations that our economy is treading in negative territory. Further to this, South Africans experienced a watershed moment last week. Chief Justice Mogoeng read the judgement of the Constitutional Court ruling against President Zuma, after which the Rand appreciated against major currencies.
The FTSE moved sideways to close the week 0.65% higher. Annual GDP in the UK surprised markets coming in higher than what markets had expected. German retail sales eased and the DAX and EuroStoxx both closed the week 0.58% and 1.12% lower. Much of this European weakness can probably we attributed to Dollar weakness post the Fed March announcement. The Euro weakness has been a crutch for European markets of late In the US, the S&P closed 1.81% higher coupled with the NASDAQ adding 2.95%. The Dow shared in the gains, closing the week 0.97% higher. The US employment data showed positive results, but had little impact on the markets as it was already priced in. The Nikkei closed the week 4.93% lower dragged down by deepening global economic weakness. Monetary easing measures employed by the Bank of Japan have done little to stimulate growth. The Hang Seng closed the week slightly higher, adding 0.75%. Negative interest rates seem to be coming under increased scrutiny globally as a poor method to stimulate investment spending.
The Rand shrugged off negative data released last week breaking the R15/$ barrier to close the week at R14.70 to the Dollar. Most of this strength should be attributed to the US Federal Reserve’s dovish comments and not the Constitutional Courts finding on Zuma, the reason I say that is because despite these findings it is inconclusive if anything substantial will happen in its aftermath. Vehicle sales showed a deepening decline of 14.1% from an 8.1% fall a month prior. This is an very dire sign for consumer confidence which has been the backbone of our GDP numbers for the past 5 years at least.
Gold gained 0.47% to close the week at $1 221. Oil closed the week 4.38% lower, it may however rebound in the coming weeks with oil producers agreeing to a freeze in production levels. Oil remains incredibly volatile however there seems to be a higher base level which is encouraging for oil producing countries.
Manufacturing data is due for release in the coming week and it is widely expected that it will continue to deepen into negative territory. Political development in the local market will also play its part in which direction the markets will move.