The rand plunged by almost 8% against the dollar Monday, touching its weakest level on a closing basis since January 1980, as investors fled riskier assets, with tumbling oil prices adding to nervousness spurred by the spreading coronavirus.
While global sentiment was the largest factor in the rand’s performance — with the currency seen as a proxy for its emerging-market peers — local factors including renewed rolling power cuts by Eskom and a downbeat assessment by Moody’s Investors Service of South African growth ahead of its ratings review later this month contributed to the selling pressure.
Eskom warned that its maintenance plan must be supported by the government or South Africa can expect regular blackouts from power cuts of 8 000 megawatts by mid-2021, a move that would cripple the economy. The power utility said it will implement rolling blackouts from 9 a.m. on Monday, which may continue until Thursday. Moody’s said on Friday it had trimmed its 2020 gross domestic product growth forecast for Africa’s most industrialised economy to 0.4% from 0.7%.
The rand slid for a third day, falling as much as 7.7%. It pared the losses to be 3.2% weaker at R16.18 per dollar as of 7:55 a.m. in Johannesburg, the lowest since February 2016 on a closing basis.
The yield on rand-denominated government bonds due December 2026 jumped 19 basis points to 8.19%, while generic 10-year notes were little changed at 9.04%. Non-residents were net sellers of R2.7 billion of South African bonds on Friday, according to figures from exchange operator JSE Ltd.
The JSE All-share index plummeted by 6.25% to 48 882 points as of 10:45 a.m.
As Wayne McCurrie, senior portfolio manager at FNB Wealth and Investment says: “The markets collapse every eight to ten years. There are different reasons as to why it collapses, and when it does, you think the world is coming down before your eyes, and that things will never be the same again but the worst thing that you can do in an environment like this is to panic”.
However, McCurrie does point out that it is unusual for the stock markets to fall by more than 5% in one day.
“But this is not due to South Africa’s lying economic problem. The previous stock markets were overvalued so the markets are not currently collapsing because of the widespread of the coronavirus,”
Another market watcher Chris Gilmour says “Everything is just falling”.
Gilmour says that the last time the markets dropped like this, including seeing the oil shares falling, was during the 1991 Gulf War.
“What happens when you get this sort of environment is that the emerging markets get hammered. It is what is called a slight equity… Everyone is in panic and they are dashing for cover,” Gilmour says.
In Germany and the US the bond yields have dropped drastically,” this is crazy stuff” Gilmour says.
“Unfortunately emerging markets such as South Africa will have to pay the biggest price for all of this, because most people feel at this time that they have to leave them and go and be part of what is happening in the US treasury bonds; no matter how low they go,” Gilmour says.
The All Share index dropping drastically like this morning will most probably not continue for the rest of the day, Gilmour says.
“I have seen his happen before. It dropping too fast, and eventually it will get a rebound of some sort,” Gilmour says.
© 2020 Bloomberg L.P. Additional reporting by Melitta Ngalonkulu at Moneyweb.