- GBP ZAR strong despite UK weakness – More UK property funds suspended
- FTSE 250 languishes -10% below pre-referendum levels – BoE Governor says smaller index a good measure of market sentiment
- South African Rand weakened by recession fears – Traders shorting retail stocks in large numbers
- GBP ZAR exchange rate forecast – Recent Markit manufacturing PMI suggests better-than-forecast production performance data incoming
Despite widespread overall losses, GBP ZAR holds a position of strength, as concerns over South Africa’s economy trump UK Brexit fears.
GBP ZAR Exchange Rate Strong despite FTSE 250 Slump Revealing Brexit Weakness
Gains made by GBP ZAR are almost entirely due to weakness in the Rand, as the developing Brexit situation continues to unnerve UK investors and weigh on sentiment. Markets still haven’t fully recovered from the shock of three of the largest UK property investment funds, who together manage a combined £5.5 billion in assets, suspending redemptions yesterday. This blocked investors from removing capital from the funds in an attempt to break a vicious cycle of desertion and devaluation. The markets reacted skittishly, however, with investors wondering what fund would be temporarily closed next. Things worsened from the market’s point of view today when another three property funds also suspended trading, with analysts warning that they could remain that way for months. The total assets managed by all suspended funds is now over £15 billion.
Today, news that the FTSE 250’s latest decline brings it down to -10% below pre-referendum levels is further unnerving the markets. This is particularly concerning considering if comes just a day after Mark Carney, Bank of England (BoE) Governor, stated that the 250 index was a better measure of market sentiment than the 100 index.
This is because the FTSE 100 is made up of the largest companies in the UK, who are clearly going to be in a better position to weather the storm of ‘Brexit’ volatility than smaller companies. Because three-quarters of FTSE 100 investors are based overseas, the weakened Pound has artificially inflated share value, meaning that the FTSE 100 is currently trending above pre-referendum levels. Analysts had been warning that this created a false picture of market sentiment and ‘Brexit’ fears, so the performance of the FTSE 250 has come under more intense scrutiny recently.
Despite all this, the Pound Rand exchange rate remains bullish. Gains are slowly ceding, however.
South African Rand (ZAR) Crashes as Fears of Recession Grow
Fears of a recession in South Africa continue to grow, with the latest data and market sentiment all pointing towards a worsening downtrend. Consumer confidence figures for the second quarter, released yesterday, showed that sentiment was down to -11 from -9, although this was marginally better than the forecast of -12. The Standard Bank PMI fell further-than-expected, however, dropping into contraction territory at 49.6. The latest survey of estate agents showed that residential market activity was sliding again in the second quarter, after picking up in the first three months of 2016.
Traders are currently betting that the South African retail sector is heading for a fall, perceiving the value of shares in companies like Lewis, Pick ‘n Pay and Massmart as being significantly overvalued. They also believe that South African retailers’ reliance upon purchases driven by loans leaves them vulnerable to a marked decline. 22% of the share interest in Lewis is from traders shorting stocks; borrowing stocks to sell, hoping that company shares later decrease in value so that they can ‘close’ the deal by buying them back at a lower price in order to return them to the broker, while keeping the difference as profit.
Also weakening ZAR sentiment are warnings from a senior Treasury official that Finance Minister Pravin Gordhan’s fiscal policy changes would not be enough to boost economic growth. According to Director General Lungisa Fuzile;
‘It is unlikely that growth … will come from tinkering or manipulation of macroeconomic policy variables … in other words reducing taxes or increasing expenditure.’
Pound Rand (GBP ZAR) Exchange Rate Forecast: Will UK, SA Data Overrule Brexit & Recession Fears?
Tomorrow sees the release of UK industrial and manufacturing production figures for May. Industrial production is predicted to slow year-on-year to 0.5% after growth of 1.6% the previous month, while manufacturing production is forecast to have eased from 0.8% to 0.6%. However, Markit’s UK manufacturing PMI, released last Friday, showed that the manufacturing sector had performed better-than-expected, with growth accelerating to 52.1 when a stagnation at 50.1 was expected. This suggests that tomorrow’s production statistics could show stronger growth, which would likely cheer investors among the current atmosphere of Brexit gloom and dovishness.
The only data for South Africa tomorrow is the foreign exchange reserves figure, which is expected to show little change and is unlikely to distract from the current economic fears.
Current GBP, ZAR Conversion Rates
The Pound South African Rand (GBP ZAR) exchange rate is currently trading between 18.9880 and 19.3490.
Comments are closed.