MARKET WRAP: Fitch outlook change and Moody’s comment put rand under pressure

The rand weakened further late on Friday after ratings agency Fitch dropped the outlook on SA’s sovereign debt to negative from stable.

The news came just a day after credit ratings agency Moody’s Investors Service issued a warning about Eskom’s R59bn bailout.

The rand was in the midst of a rally when the government announced a further R59bn bailout for Eskom this week, prompting Moody’s to issue a statement saying the move was credit-negative and would put further strain the country’s fiscus.

The rally in the rand came in the wake of expectations that the US Federal Reserve will cut interest rates, and saw the local currency trade below R14/$ for almost two weeks.

In its statement on Friday, Fitch said the outlook revision reflected a widening the in the budget deficit as a result of lower GDP growth and increased spending, including state-owned enterprise (SOE) support.

“Renewed downward revisions to GDP growth in 2019 also raise new questions about SA’s GDP growth potential. The social context of exceptionally high inequality will constrain the government’s policy response to these challenges,” Fitch said.

“Fiscal metrics have deteriorated significantly due to under-performance of revenue, which is expected to worsen in the current fiscal year as growth has turned out to be weaker than expected. Low-trend GDP growth means that economic recovery is not expected to drive a major fiscal improvement in later years, while we also forecast expenditure to increase.” 

By 6pm, the rand had weakened 1.4% to R14.2896/$, 1.1% to R15.8835/€ and 0.8% to R17.6969/£. The euro was down 0.28% to $1.1115.

The benchmark government 10-year bond was also weaker, with its yield rising 28 basis points, or 0.28 percentage points to 8.45%. Bonds yields move inversely to bond prices.

The JSE closed lower on Friday after the rand weakened to intra-day worst of R14.30/$.

Data on Friday showed that US second-quarter GDP slowed amid mounting expectations that the Federal Reserve may ease monetary policy to stimulate economic activity.

The US economy grew 2.1% year-on-year in the second quarter from 3.1% previously. Despite the fall, the growth surpassed the 1.8% forecast by analysts in a Bloomberg poll. The latest quarterly GDP figures are considered as crucial data ahead of the Fed’s meeting at the end of July as markets have fully priced in a rate cut. Market expectations of a 25-basis-point cut were at 79.6% on Friday according to CME Groups’s Fed watchlist.

Shortly after the JSE closed, the Dow was flat at 27,144.44. In Europe, the FTSE 100 had gained 0.79%, France’s CAC 40 0.54%, and Germany’s DAX 30 0.38%.

The JSE all share fell 0.16% to 57,570.50 points and the top 40 was flat. Banks lost 1.26% and financials 1.23%.

Absa was down 1.97% to R163.29, Nedbank 1.09% to R245.79, Firstrand 1.07% to R62.24, and Standard Bank 1.06% to R182.29. 

Anglo American dropped 3.3% to R369.18 after Indian billionaire Anil Agarwal said on Thursday that he is selling his stake in the diversified mining company.

MTN fell 0.12% to R106.78 despite it saying its Nigerian business service revenue increased by 12.2%, voice revenue 11.4%, and data revenue 31.7% for the six months ended June. 

Dipula Income Fund A-shares fell 1.84% to R10.15 after the property company said on Friday that it made a non-binding offer to acquire 100% of SA Corporate Real Estate. 

Stefanutti Stocks rose 5.17% to 61c after the construction company said on Friday that it has received R120m in project fundraising.

Sasol regained 0.81% to R310.50 after dropping more than 6% on Thursday after it said it had written down the value of its assets in North America and Africa by R18.1bn.

Rolfes jumped 25% to 55c after it said earlier it was in unspecified negotiations with a third party.

On Monday, the Reserve Bank is scheduled to report on private-sector credit extension and M3 money supply for June, while Statistics SA will release the unemployment rate for the second quarter of 2019 on Tuesday.

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