JSE financials reel as Gordhan probe escalates

Johannesburg - Financial shares on the JSE have been left reeling after an investigation surrounding Finance Minister Pravin Gordhan took a new twist, but there were gains among rand hedge stocks.

The rand fell to a three-week low against the dollar and domestic government bond yields climbed by the most since December after a news website said Gordhan had been summoned to report to police on Thursday. Yields on government dollar debt jumped to a three-week high and the cost of insuring the securities against default climbed, while banking shares headed for the biggest drop since June 27.

The latest development signals a deepening rift between Gordhan and President Jacob Zuma, whose ruling African National Congress called at the weekend for the national budget to be “reprioritised” as the party tries to win back support after a drubbing in local government elections earlier this month. Gordhan has pledged to cap spending and debt as he battles to stave off a credit-rating downgrade to junk.

“The threat that Finance Minister Gordhan will no longer be able, or perhaps willing, to continue in his position is now real,” John Cairns, a currency strategist at Rand Merchant Bank in Johannesburg, said in an emailed note. “Expect further volatility today and the risk bias is now clear.”

Gordhan received “correspondence” from the Hawks and is getting legal advice, Treasury spokesperson Phumza Macanda said after the Daily Maverick said on Wednesday the finance minister and four former tax officials had been asked to report to the unit’s office on Thursday. Gordhan was informed he would receive a “warning statement” given to accused persons before they are charged, the news website reported, without saying where it got the information.

The rand declined as much as 1.2% on Wednesday before trading 0.1% weaker at R14.0182 per dollar by 10:30, extending Tuesday’s 3.1% plunge and heading for the weakest level since June 28. Three-month implied volatility climbed 110 basis points to 19.02%, indicating that options traders anticipate wider price swings in coming months.

READ: Rand plunges on report Hawks circling Gordhan

Yields on benchmark government bonds due December 2026 surged 42 basis points to 8.94%, the most since Zuma roiled markets in December by firing then-finance minister Nhlanhla Nene and replacing him with a little-known lawmaker. The cost of insuring South African debt for five years using credit-default swaps rose 9 basis points to 240 as yields on dollar bonds due September 2025 climbed 19 points to 4.07%.

Rand hedges gain as banking sector tumbles

However, investors poured money into rand hedge shares as a weaker rand makes the big dual-listed shares on the JSE attractive for investors who want to protect their portfolios against a declining rand.

As a result, the Industrial index - which includes most of big shares representing a major part of the JSE market capitalisation - was already 1.85% higher by mid-morning. The Resources index was pulled 2.80% higher by the dual-listed commodity producers, while gold shares - which also benefit from a weaker rand - boosted the Gold index by 3.79%.

The Financial index was however sharply lower and already 2.30% down at mid-morning, with some of the major banks losing more than 5%.

Fin24 correspondent David van Rooyen reported that the All-share index was 1.03% higher by mid-morning at 53 502 points, trading above 53 000 for the first time in August. At that stage the Top 40 index was 1.33% up at 46 753 points.

Although some dual-listed shares traded sharply lower in London, where their primary listings are, this did not deter local investors. It was particularly evident in the resources sector, where the FTSE mining index dropped sharply after Glencore [JSE:GLN] announced a 66% drop in earnings. Glencore lost 2% on the London market and Anglo American [JSE:AGL] retreated more than 3%, while BHP Billiton [JSE:BIL] and Rio Tinto lost at least 1.4%.

All these shares were however higher on the JSE. BHP Billiton gained 2.93% at R197.25 and Anglo American was 2.67% higher at R159.14. Glencore at mid-morning was unchanged at R33.60, but traded as high as R34.86 despite concerns about the copper price, which touched a new six-week low.

Naspers [JSE:NPN] was again one of the top performing shares in the Industrial index and reached yet another intraday all-time high of R2 365.71, 1.76% higher than the previous day’s close. Before Wednesday’s trade, the stock was already 8.71% higher over the previous seven days.

Popular rand hedge shares British American Tobacco [JSE:BTI] (BAT), Richemont [JSE:CFR] and SABMiller [JSE:SAB] were all trading substantially higher on the JSE despite losses on overseas markets. At mid-morning BAT was 0.60% lower in London but 3.80% up on the JSE at R898.01.

SABMiller’s share price was also back above R800, gaining 4.63% to R813.40 but losing 0.06% in London. Richemont was 3.89% stronger at R86.61 but traded 0.08% lower abroad.

Old Mutual [JSE:OML] was hammered on the London market because of its exposure to South Africa and lost more than 3%, but it gained 1.21% on the JSE at R36.72.

It was however one of the few financial shares on the JSE that traded higher. Sanlam [JSE:SLM] lost 3.39% to R63.69 and banking share prices were sharply lower. Standard Bank [JSE:SBK] lost 6.11% to R139.80 and FirstRand [JSE:FSR] was 5.20% softer at R46.89. Barclays Africa [JSE:BGA] shed 5.16% to R154.97 and Nedbank [JSE:NED] traded 4.02% down at R213.39.

‘Early days’

“If we do see the arrest and removal of Mr Gordhan from office then you can bet the market will start to aggressively price in a rating downgrade,” Warrick Butler, head of emerging-market spot trading at Standard Bank said in an emailed note. “I guess what is mostly surprising is that we didn’t see the rand weaken more; early days perhaps.”

The Sunday Times newspaper reported in May that Gordhan may face dismissal and arrest on espionage charges for allegedly setting up the South African Revenue Service’s National Research Group to spy on politicians including Zuma. Gordhan denied any wrongdoing and said he was being harassed by people intent on manipulating the justice system for political gain, while Zuma’s office denied there was a rift between him and the finance minister.

Gordhan served as head of the tax authority before his first term as finance minister from 2009 to 2014. He was reappointed to the position in December.