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Rand firms, banks strengthen as resistance to Zuma swells

Apr 12 2017 18:48
Martin Harris, Trading desk at EasyEquities

Cape Town – The rand strengthened pace on Wednesday, allowing for a recovery in the financial sector.  At close of the JSE the rand was trading at R13.63 to the US dollar, 1.06% firmer than Tuesday’s close. A rally in gold as well as a political rally against President Jacob Zuma saw the rand firm against the dollar.
Multiple opposition parties united in solidarity and marched to the Union Buildings on Wednesday, as resistance against President Zuma grows.

Banking shares emerged as the main winners on the market as bond yields steadied, the overall Financial Index climbed +1.17% led by Standard Bank [JSE:SBK] +3.83%, FirstRand [JSE:FSR] +3.20%, Nedbank [JSE:NED] +2.60%, and Barclays Africa [JSE:BGA] +1.38%
The blue-chip Top 40 index closed flat -0.02% accompanied by the All Share Index which closed 0.03% firmer – the general weakness led by a 2.69% drop in the Resources Index.  The Industrial Index managed to firm 0.68%, whilst the Gold Index weakened 0.82%, defying a positive rally in the gold price.

The outlook for consumer spending has faded following the downgrade of South Africa’s credit rating by both S&P and Fitch, which is expected to result in higher inflation due to the rand’s sensitivity to the dollar. Higher inflation may prompt the reserve bank to increase interest rates, further squeezing consumers.  

The latest retail sales numbers for February, released on Wednesday, paints a bad picture prior to the credit ratings downgrade announced late in March.  The data indicates that annual sales had contracted by -1.7%, in line with market expectations of -1.8% from -2.3% in January. The pop in February sales relative to January was expected, as consumers recover from festive season spending.

The downward pressure came from the ‘textiles, clothing, footwear and leather goods’ category where sales dropped by 7.6% on an annual basis.
The higher cost of living will put further strain on disposable income, which was already depressed by low wage growth and higher taxes.
Given the restricted money supply, along with softer consumption, the market for credit should be subdued. At the same time banks and other lending institutions will be looking to reign in unsecured credit, which will further throttle consumption spending.
The overall forecast continues to be negative and, unless there is a structural change in South Africa, retail sales growth is likely to remain weak as consumers contain spending on non-essential goods.

International markets

Office jobs data in the UK released on Wednesday surprised with a marginal drop in the UK jobless rate, whilst wage inflation increased above expectations.  Excluding bonuses, UK wages 2.2% beating forecasts. The positive data saw the pound firming to $1.25 against the US dollar.

US Equites slipped during early trade on Wednesday as investors expressed concerns over the geopolitical landscape. The S&P500 was 0.31% lower at the close of the JSE, falling below its medium term moving average.  

Crude Oil prices struggled for gains, and weakened by 0.37% to $56.02/bbl after the US energy information administration reported a larger than expected drawdown of 2.17 million barrels.  

Gold built on Tuesday’s gains by +0.12% and traded at $1275. The traditional safe-haven asset has seen a rally following military action by the US in Syria as well as the threat of combat in North Korea.  

*This report isfrom the Trading Desk at EasyEquities, Fin24's latest content partner on equities and market moves.

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