South Africa’s rand came under pressure yesterday, revisiting the sell-off triggered by political turmoil and a ratings downgrade, while currencies elsewhere broadly strengthened and emerging stocks rose to a one-week high.
The rand lost 0.3% against the dollar in volatile trading, but was still off the three-month lows it hit on Tuesday in the wake of S&P Global Ratings cutting the country’s credit rating to ‘junk’. The downgrade followed the sacking of Finance Minister Pravin Gordhan, which outraged opponents and business leaders and deepened a rift within the ruling ANC party.
South Africa’s biggest trade union has called on President Jacob Zuma to quit.
Inan Demir, senior emerging market economist at Nomura, said there was room for further weakness in South African assets, with Zuma’s position not as weak as had been perceived.
“He is still in a strong position to stay in place and implement his policies...and these policies are likely to lead to further credit downgrades and further weakness in the rand,” he said.
Other South African assets have steadied. The average yield spread of sovereign bonds over US Treasuries on the JP Morgan EMBI Global Diversified index fell 4 basis points (bps) to 275 bps, after hitting a four-month high on Monday while five-year credit default swaps narrowed.
The local benchmark government bond yield dropped to 8.94%, after touching 9.2% on Tuesday.
A weaker dollar allowed other emerging currencies to make gains, with the Turkish lira firming 0.2 % and the Russian rouble 0.3%. The latter was supported by oil prices rising to near a one-month high after an unplanned outage in the North Sea. However, China’s yuan slipped 0.2% against the dollar as investors awaited a summit between US President Donald Trump and his Chinese counterpart Xi Jinping on Thursday and Friday.
Trade and security are expected to feature prominently.
The broader economic backdrop remained relatively benign, and MSCI’s benchmark emerging stocks index rose 0.4% to one-week highs, led by a strong performance in Asia that was echoed in emerging Europe. Taiwan stocks gained 1.4% lifted by an 8% surge in the shares of electronics company Hon Hai Precision, an Apple supplier, which posted a surprise 30% rise in net profit.
Chinese mainland stocks rose 1.5%, boosted by government plans to build a new economic zone.
In Europe, Russian dollar-denominated stocks were amongst the outperformers, up 1.2% to 1-1/2 month highs, whilst Budapest shares gained 0.5%. The zloty was flat against the euro ahead of Poland’s central bank meeting later in the day at which it is expected to keep rates unchanged at a record low 1.5%. Romanian policymakers are expected to hold interest rates at 1.75%.
“Central banks in the case of Poland and Hungary are still in a good position to look through the acceleration in inflation, attributing it to non-core factors,” said Demir.
The Croatian kuna fell to an eight-week low ahead of Croatian legislation on big corporate failures, designed to prevent them from destabilising the wider economy and financial system.