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Have global markets started to recover?

FXTM research analyst Lukman Otunuga takes a sober look at the coronavirus crisis, fiscal packages, gold’s behaviour, the oil situation and what Moody’s may decide on South Africa.

NOMPU SIZIBA: Every so often we get an outside-of-South Africa view of the global economic and market situation. Of course, the coronavirus continues to dominate most discourse around the world.

I’m joined on the line by Lukman Otunuga. He’s a research analyst at FXTM. Thanks very much, Lukman, for joining us. Have global markets more or less stabilised now, with all the support that’s been announced – although I do see that there’s a little bit of weakness following very bad unemployment claims coming out of the United States?

LUKMAN OTUNUGA: It’s been another volatile week for financial markets, and we’ve seen central banks release monetary policy bazookas, …… …… Even governments are doing what they can, especially the United States. We are releasing that $2 trillion emergency fiscal package. This has created some stability through financial markets. However, as you can see today, and especially if you look at the European stocks, we are in the red and US stocks are kind of stabilising. But I feel that this is going to be short term.

We’re looking at what’s happening. I believe this is just a short-term fix to a longer-term problem. The coronavirus is not a trade or a financial crisis; it’s a health crisis, and its more psychological. So no matter how much monetary policy support or fiscal injections governments are going to try to pump into the financial system, as long as the death toll continues to rise and infections continue to grow, uncertainty remains will remain a major theme across the markets.

NOMPU SIZIBA: Yes. Gold temporarily lost its safe-haven appeal last week. We saw, when markets were really falling hard, somehow it wasn’t really rising. But that seems to have changed this week.

LUKMAN OTUNUGA: Yes. Last week gold’s decline actually caught many people by surprise, because traditionally gold is a safe-haven asset, so we should be shooting to the stars and beyond when stock markets are rising.

But the major thing is last week losses were so extreme across stock markets that investors and major institutions had to offload on their gold positions or other positions for cash to cover margin calls. That’s why gold initially declined.

But this week you can actually see the price is in a good spot. It has appreciated almost 5% since the start of the week. And I expect gold to continue pushing higher, based on dollar weakness, and fears the global economy can actually experience a recession in 2020.

NOMPU SIZIBA: Most commentators ask when, not if, there’ll be a global recession. Is this why we’re seeing the oil price as low as it is?

LUKMAN OTUNUGA: Absolutely. Oil has been one of the biggest casualties in the coronavirus outbreak. It actually depreciated 60% since the start of the year.

Now there’s two things here on the oil price. Number one is that the coronavirus is fuelling fears of a global recession, and in times like this demand for energy drops. So that’s one thing.

On the other side of the equation we have this raging price war between Saudi Arabia and Russia, so we have this horrible combination of falling demand and oversupply, and this is what’s really weighing heavily on oil. If you look at the commodity run now, it’s actually been trading within a range, but we have to keep in mind at the end of the month the Opec plus production cartel expires. If this results in other producers pumping production, it could result in oil trading lower.

NOMPU SIZIBA: What do you think the world is going to look like in the post-corona crisis phase, and what is the outlook particularly for emerging markets after all of this?

LUKMAN OTUNUGA: Right now there’s been a lot of gloom and doom. Major institutions like the IMF have already warned that the recession that we can experience in 2020 is going to be worse than 2008. So that’s quite frightening, while the Organisation of the Economic Co-Operation and Development have said that world growth could actually halve to a staggering 1.5%. So when these big institutions are showing these gloomy predictions, of course it’s quite negative. And this is really bad news for emerging markets because the lack of appetite for risk will hit many emerging market assets, and ……

At the same time investment certainty is boosting appetite for the dollar. Now, a strong dollar will hit emerging markets in two ways. Number one, through exports, and number two through emerging markets that have high dollar-denominated debt. So the outlook for emerging markets is sadly negative. But it’s not only emerging markets, it’s the same for developing economies.

NOMPU SIZIBA: We hear that markets are in “bear market” territory. When are we going to see markets reinstated to where they were perhaps five to six weeks ago?

LUKMAN OTUNUGA: It’s good you said that. It was in March that the 11-year bull run in the S&P 500 came to an end. Now we are seeing this negative trend across major emerging markets in the world. And the truth is, nobody wants to hold risk in the face of uncertainty. And this is exactly what we’re seeing.

If this was a normal situation, all these explosive measures implemented by central banks, unlimited QEs, the ECB’s done a limite QE. The Fed …… doing the same thing. We’ve had some fiscal packages which should have been enough to support markets, but we’re seeing the complete opposite. To answer your question, I think for us to have normality you’ll see markets …… There needs to be a cure for the coronavirus, or visible signs that the number of infections is falling, and deaths also are falling. yes souls also.

NOMPU SIZIBA: Then lastly, of course South Africa is getting rated by Moody’s tomorrow. Could the Covid-19 situation be our saving grace, or not really?

LUKMAN OTUNUGA: You said it. The coronavirus is the silver lining for South Africa’s economy….. This black swan event has really destabilised a lot of things and for Moody’s, the ratings agency, it wouldn’t make sense for them to downgrade South Africa’s credit rating when things have been so negatively skewed. So this could actually buy some more time for South Africa to stabilise and find its footing.

I was looking at the South African bond market, and interestingly despite the credit rating just around the corner, there’s still a lot of appetite for South African bonds. So that is quite positive in that stance. But this is a question nobody really knows the answer to, because South Africa has to deal with domestic conditions revolving around Eskom, just the negative economic growth, and at the same time has to deal with coronavirus and the trading relationship it has with China and slowing global growth. So yes, South Africa has bought more time, but I don’t know if this will be enough to avoid an credit downgrade.

NOMPU SIZIBA: Not that long ago, at the beginning of the year, that rand was trading R14 against the US dollar. It’s now well within the R17s against the dollar. Do you think it’s going to take time for us to get back to around R14?

LUKMAN OTUNUGA: It’s going to take time. The demand was actually reaching a whopping 24% against the dollar at the start of the year and …… 20% against most G10 communities.

We hit an appetite for the South African rand; it’s simply favourable domestic conditions, the fact that the Sarb is using monetary policy as well, and just with all the uncertainty. For the rand to trade back to the R14/dollar level, you need South African conditions to somewhat stabilise, and also for the dollar to weaken. And these are things that we’re not going to see any time soon.

NOMPU SIZIBA: Many thanks, Lukman, for your time this evening.



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