FULL CIRCLE

It’s been a year since COVID-19 shook the markets and started wreaking havoc on economies. And what at first seemed as though it should last a mere three weeks still appears to have no end in sight, even as global vaccine programs are well underway. Reflecting on the past year, many things seem to have come full circle, including the rand and the local State of the Nation Address.

POLITICAL BICKERING IN THE US AND BREXIT TEETHING PROBLEMS STEAL HEADLINES

Former President Donald Trump has once again made history by becoming the first president to face impeachment hearings after leaving the Oval Office, as well as becoming the first president to face impeachment twice. His latest trial follows the recent storming of the Capitol, with Trump standing accused of inciting violence. Unfortunately, even following Trump’s exit from the White House, the rift between the Democrats and the Republicans remains a gaping wound, with political bickering dividing the nation even further amidst the economic fallout caused by the pandemic.

All eyes remain on the US government and expected fiscal stimulus, and the Federal Reserve’s stance regarding monetary stimulus and policy also continues to act as a key driver in financial markets. Federal Reserve Chairman Jerome Powell reiterated his dovish stance on Wednesday, citing concerns over a continuously weak labour market. The Fed thus looks set to continue its accommodative monetary policy path.

Trade between the EU and UK seems to be approaching some sense of normality again following the Brexit fallout seen in the wake of the UK’s official exit from the bloc on 1 January 2021. New terms of trade are kicking in, and the EU remains a crucial UK trading partner, as recent data indicates that the EU buys some 42.6% of the UK’s total exports and is the source of 51.8% of the UK’s total imports. Additionally, Germany is the UK’s biggest trade partner within the EU region, accounting for 21% of the UK’s imports and 19% of its exports. However, the partnership is far from perfect. The UK has requested an additional two-year grace period on some of the new trading rules to allow time for businesses to adjust, while the EU is adamant that this will remain off the table until the Northern Ireland protocol is fully implemented.

The Northern Ireland protocol has featured in headlines quite often of late, and it is worth taking some time to fully understand it. In essence, this protocol allows for the movement of goods between Ireland and Northern Ireland, while also allowing for certain checks to be imposed on specific goods.

For example, the EU has very strict rules regarding certain foods such as meat, milk, fish and eggs. This means that some food products arriving in Northern Ireland from England, Scotland or Wales first need to be checked to ensure that they meet EU standards, going through border control at ports where officials may check paperwork and conduct some physical inspections.

However, under pressure over vaccine rollouts, the EU threatened to trigger Article 16 of the protocol, which would potentially lead to a hard border between Northern Ireland and the Republic of Ireland – causing additional tensions on top of the teething problems already faced at border posts. Following supply problems with the AstraZeneca vaccine, the EU announced on 29 January that it would introduce export controls on vaccines produced in the EU, preventing them from being shipped to the UK. However, swift public outrage saw the EU make a quick U-turn on the unpopular decision.

Below follows a quick summary of key data for the week:

RAMAPHOSA DELIVERS SOMBRE SONA

Locally, all eyes were on President Ramaphosa this week as he delivered the State of the Nation Address (SONA) on Thursday evening. Normally associated with red carpet theatrics and designer outfits, the elite event took place with far less fanfare than usual, as COVID-19 restrictions shifted the emphasis to mask-wearing, social distancing and virtual interactions instead.

As Ramaphosa kicked off his address, one couldn’t help but notice his rather sombre mood, as South Africa’s economic recovery will pose a significant challenge in the months and even years ahead.

Some noteworthy points from the Thursday evening address included:

• The easing of licensing restrictions could free up 5,000 megawatts of electricity;
• The focus on operational efficiency and maintenance in Eskom remains top of the agenda;
• Economic recovery will be driven by infrastructure development. The infrastructure fund and associated programs are well underway, including the rollout of data in schools;
• Initiatives are being undertaken to bring manufacturing back to South Africa and reduce imports by 20% over the next five years;
• President Ramaphosa expects a strong rebound in employment by the end of the year;
• Programs to assist farmers and small businesses will be implemented (although there is no clear indication as yet on what exactly these programs will entail).

Ramaphosa further raised the issue of corruption – a topic that has become part and parcel of his addresses since he came into office. However, the implementation and monitoring of the various government initiatives remains a key challenge.

SONA offered few surprises and the rand remained steady throughout the address, with no major policy announcements. But with ratings agencies keeping a close eye on the country following a downgrade warning by Moody’s earlier this week, SONA will set the tone for the February Budget Speech. Interest will now shift to National Treasury as it seeks to address the question of finding the required resources to fund the programs government envisages to drive the economy forward and restore lost capacity.

The rand continued to enjoy the benefits of the global backdrop this week, as carry trade continued to support the currency.

On the data front, both manufacturing and mining sectors unexpectedly rebounded in December after several months of declines, adding 1.8% and 0.1% year-on-year respectively.

LOOKING AHEAD

Following SONA, we will now turn our attention to the upcoming parliamentary debate, as well as the National Budget and feedback from ratings agencies. Locally, the vaccine rollout program also remains a key element in getting the economy back on its feet.

From a global perspective, focus remains on stimulus and vaccine rollouts as countries race to restore full economic capacity.

The rand is set to trade between R14.50 and R14.85/$, with the bias towards a weaker rand depending on the National Budget outcomes. Our sights will be set on R15.05/$ should we see a break above R14.85/$.

Data expected during next week includes:

Wednesday:

• UK inflation rate, PPI and retail price index
• ZA inflation and retail sales
• US inflation, industrial production, manufacturing production and retail sales

Thursday:

• US jobless claims

Friday:

• UK retail sales & PMI

The rand started the day trading at R14.64/$, R17.74/€ and R20.18/£.