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Weekly Commentary - 03 March 2021

Weekly Commentary


The Eskomphant in the National Budget room


What Made The Headlines ...


During our last family meeting, President Cyril Ramaphosa announced that South Africa's second Covid-19 wave was officially over. The country has moved to lockdown Alert Level 1, well before the Easter holidays, threaten another spike in infections.  The curfew is relaxed, more types of gatherings are permitted, and the liquor ban is lifted.


Family meetings have been instrumental – and well attended – as a communication tool along South Africa's Covid-19 journey and found us contemplating the benefit of extending these family meetings to other matters, such as the South African economy and corruption.  With a captive audience and a more urgent sense of accountability, these forums could present a more inclusive way of dealing with other pressing matters, like Eskom debt.


The debt of cash-strapped Eastern Cape municipalities to Eskom has doubled to R2bn, and Soweto residents reportedly owe Eskom around R20bn in debt.  Then there is the R2.17bn in penalties issued to Optimum Coal for supplying substandard coal that had been outstanding since 2013 when it was still under mining multinational Glencore.


The government allocated Eskom R56bn for 2020/21, of which R6bn of the equity allocations had been provided by 30 September 2020. The utility has been assigned a further R31.7 billion for 2021/22 by the government.  The funds are meant to stabilise the utility while the government restructures it into three separate entities; transmission, generation and distribution, under Eskom Holdings SOC Ltd.


In other news, the Turkish lira, Brazilian real and South African rand led significant global declines last week in the worst developing-nation currency selloff since late September. Those exchange rates have the highest one-week implied volatility globally, with some analysts warning of more pain ahead.


U.S. President Joe Biden sent a message to Iran.  Friday's strike was the first known military action taken by the Biden administration, making it the seventh U.S. administration in a row to use military force in the Middle East.  Administrations in Washington come. Administrations in Washington go. Some things, however, never change.  The Pentagon says the strike was intended as a U.S. response to a series of recent rocket and mortar attacks on U.S. and coalition positions in Iraq.  


The European Union's 27-nation vaccine strategy is splintering as member states turn to nations outside the bloc to boost a faltering roll-out plagued by supply issues, contract skirmishes and sluggish takeup.


On Monday, Zimbabwe received 200,000 doses of Sinopharm Covid-19 vaccines that China donated.


The International Olympic Committee (IOC) announced that the Australian city of Brisbane is the "preferred host" for the 2032 Summer Olympics, in a move that officials said was designed to bring "stability" to the Games after the delay of the Tokyo 2020 edition.



Global Weekly Commentary


South Africa


In January, on an annual basis, the M3 money supply registered a rise of 9.15%, less than market expectations for an advance of 9.55%. In the prior month, the M3 money supply had risen 9.48%.


New vehicle sales recorded a drop of 13.3% on a YoY basis in February. In the previous month, new vehicle sales had fallen by 13.9%.


On a Year-on-Year basis in January, the private sector credit rose 3.26%, lower than market expectations of an advance of 3.8%. The private sector credit had risen 3.55% in the previous month.


Trade surplus dropped to R11.83bn in January, compared with market expectations of a trade surplus of R15.20bn. South Africa had posted a trade surplus of R33.06bn in the previous month.


Mining is one of the few industries that seem to have escaped the clutches of the coronavirus pandemic, as the price of a range of commodities rose in recent months.


African Rainbow Mineral has reported record headline earnings in the six months to end-December, as higher commodity prices and weaker rand boosted its basket of products.  Headline earnings surged 134% to R5bn, thanks to higher iron ore and platinum group metal prices and increased export iron ore and manganese ore sales volumes, the company said in a statement.


Total iron ore sales volumes were up 6% to 8.2mn tonnes, while export sales volumes were 8% higher at 6.7mn tonnes. However, local sales volumes held steady at 1.5mn tonnes.


Manganese ore sales volumes rose 4% to 1.9mn tonnes. Export sales volumes were 4% higher at 1.8mn tonnes.





"The near-term outlook for the European economy looks weaker than expected last autumn, as the pandemic has tightened its grip on the continent," the European Commission said in a report last month in which it cut its growth forecast for the E.U. economy this year to 3.7%, from 4.1% in November.


Additional spending over and above loans and guarantees ranges from 4% of GDP in Spain to 11% in Germany, Europe's largest economy, according to the International Monetary Fund. In contrast, fiscal stimulus in the United Kingdom amounts to over 16% of the economy. The United States is closer to 17% of GDP, a number that would increase to 25% if Biden's $1.9tn stimulus package is approved.


According to Carsten Brzeski, Global Head of Macro for ING Research, while the roll-out of the European Union's historic €800bn ($961bn) relief package in the second half of this year, which is not included in the IMF figures, could provide a welcome boost to the bloc, it is unlikely to be a game-changer. He added these funds will be released over several years and won't make a massive difference to the hardest-hit countries.


Germany's financial watchdog has taken direct oversight of day-to-day operations at Greensill Bank, as the lender's ailing parent company warned that its loss of $4.60bn of credit insurance could cause a wave of defaults and 50,000 job losses.


The Spanish Secretary of State for Tourism said that the country is open to setting up bilateral agreements and safe corridors with non-EU "third countries", including the U.K. if no deal is reached regarding travel requirements across the European Union. The latest PMI survey showed Spain's services sector contracted for the seventh straight month in February amid restrictions on activity related to the global coronavirus disease pandemic.


Italy's gross domestic product shrank 1.9% on quarter in the three months to December 2020, less than preliminary estimates of a 2% contraction and after a record growth of 15.9% in Q3. Consumer spending fell 2.7% while government spending rose 1.5%, and investments edged up 0.2%. Net foreign demand contributed negatively to growth, as exports increased 1.3% while imports rose at a faster 5.4%. Year-on-year, the GDP shrank 6.6%, following a 5.2% slump in the third quarter and in line with earlier estimates. For the year 2020, the economy contracted by 8.9%, the steepest contraction since World War II.



United Kingdom


On Monday, U.K. Prime Minister Boris Johnson outlined a "cautious" four-step roadmap to take England out of its Covid-19 lockdown with the ultimate aim of lifting all measures by 21 June 2021, declaring that the nation was on a "one-way road to freedom."  The first step of the strategy begins with opening schools and colleges to all pupils from Monday 8 March.


U.K. Chancellor Rishi Sunak delivered his 2021 budget to Parliament and promised to do "whatever it takes" to support businesses and households through the final months of COVID-19 restrictions.


A recent rally has made sterling the best-performing G10 currency of 2021, supported by hopes of a quicker economic recovery, the U.K.'s rapid pace of vaccinations and a post-Brexit trade deal with the E.U.  It was slightly higher at $1.397 today. However, it remained well below a near three-year high of $1.42 hit last week. 


The IHS Markit/CIPS UK Services PMI came in at 49.5 in February 2021, slightly weaker than the flash estimate of 49.7 and compared with January's eight-month low of 39.5. Still, the latest reading signalled the softest rate of decline since the current phase of contraction began last November.  New order volumes decreased only marginally, despite a sharp decline in new work from abroad. In contrast, backlogs of work fell again due to a lack of forward-bookings and reduced business capacity pressure.


The pace of job shedding was the slowest since the COVID-19 pandemic first hit employment numbers last March, helped by the government's furlough scheme.


On the price front, input cost inflation hit a 12-month high, while output charges rose the most since February 2020.


Business optimism improved to the strongest level since December 2006.



United States


Private businesses in the U.S. hired 117K workers in February of 2021, well below market forecasts of an increase of 177K and following an upwardly revised 195 thousand gain in the previous month. The service-providing sector created 131K jobs led by trade, transportation & utilities (48K); education and health (35K); leisure and hospitality (26K); professional and business (22K); other services (3K); while financial activities showed no change and the information sector lost 3K jobs. The goods-producing sector shed 14K jobs due to manufacturing (-14K) and construction (-3K), while natural resources and mining added 3K. Private payrolls in midsized companies were up by 57K, small firms by 32K and large companies by 28K.


The IBD/TIPP Economic Optimism Index in the U.S. rose 3.5 points to 55.4 in March of 2021, the highest since February 2020 before the Covid-19 shutdown. The six-month outlook for the U.S. economy picked up to 53.2 from 49.5, returning to positive territory for the first time since October 2020. Also, the personal finances subindex, a measure of how Americans feel about their own finances in the next six months, climbed to 58 from 56.5. The federal policies subindex jumped 10.5% from 49.7 to 54.9.


Data from the American Petroleum Institute showed that stocks of crude oil in the United States jumped by 7.36mn barrels in the week ended 26 February of 2021, following a 1.03mn increase in the previous week.  It was the second straight weekly gain and the biggest build since the week ended 17 July.


Texas's largest co-operative power generator filed for bankruptcy protection as the financial fallout from a winter storm that plunged millions into darkness and sent wholesale electricity prices skyrocketing continued to mount.





Guo Shuqing, head of the China Banking and Insurance Regulatory Commission, told a news conference in Beijing that financial markets in Europe, the U.S. and other developed countries were trading at high levels which "runs counter to the real economy."


He pointed to gains in U.S. and European markets enabled by ultra-loose monetary policy, which he said had "seriously diverged" from the real economy. "China's market is now highly linked to foreign markets, and foreign capital continues to flow in." He added that while China could handle the scale and speed of inflows, "we must prevent volatility in [China's] domestic financial market from becoming too great".


The Japanese Yen fell 0.14% to trade at fresh 7-month lows of 106.831 against the U.S. Dollar.  Local data revealed that Japan's services sector extended declines for the 13th consecutive month in February as business activity was hit by curbs put in place to stop the spread of the coronavirus pandemic. In the meantime, Japan's lower house approved a 106.61tn yen ($1tn) draft budget for fiscal 2021; its largest ever as the need for spending on coronavirus countermeasures comes on top of already colossal welfare and defence costs.


The IHS Markit India Services PMI increased to 55.3 in February of 2021 from 52.8 in the previous month and above market expectations of 53. The reading pointed to the fifth straight month of expansion in the services sector and the fastest growth since February last year, as output expanded faster, while new orders grew at the most rapid rate in a year. New export orders declined for the twelfth month running, albeit at the weakest rate since last March.  Input cost inflation accelerated to the strongest since February 2013 due to higher prices of fuel. Selling prices were stable. Looking ahead, business sentiment improved to a one-year high due to the roll-out of COVID-19 vaccines underpinned positive expectations towards growth prospects.


The Week in Numbers



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