Markets have moved from RORO (risk on/risk off) to SOSO (stimulus on/stimulus off) to VOVO (vaccine on/vaccine off).
October turned out to be quite an exciting month with strained stimulus negotiations in the US giving way to election jitters and the potential “blue wave”. Locally, restrictions continued to ease, while the Economic Reconstruction and Recovery plan, as well as the October Medium Term Budget Policy Statement renewed hopes for the implementation of reforms.
Since then, markets have calmed a bit, but there is a tension between the short-term headwinds of lockdowns in the US and Europe amid resurgent Covid infections, and the longer-term normalisation in activity thanks to the roll out of a vaccine. Over the past week, Pfizer-BioNTech and Moderna both reported efficacy rates of 95% in their respective Phase 3 trials. This has boosted optimism that a vaccine could be available as early as January. However, we need to consider the logistical challenges of the global rollout, as these vaccines need to be stored at very cold temperatures to remain effective. This means and unequal distribution between DM and EM, but on balance, it will be a boon for global growth thanks to the positive spillovers from normality in DM to EM.
These potential spillovers will be but one factor that will inform the South African Reserve Bank’s interest rate decision, which will be announced this afternoon. There are strong arguments in favour of a cut, but equally compelling reasons for the Bank to remain on hold. Our take is that the MPC has a preference for “low for long” rather than lower, and it is always good to have some insurance for an uncertain future, vaccine hopes notwithstanding. In addition, Moody’s and S&P will opine on SA’s sovereign credit rating late on Friday night, but we do not expect any action this week. S&P already has the rating on BB-/stable outlook. Moody’s, at Ba1/negative outlook, probably has more pressure to cut the rating, but we think they will give the government a bit more time to implement reform and push through on the promised wage freeze.
While it has been a challenging year for everyone, it is still too early to call it a day, with two-sided event risk running into year-end. Good luck for the last stretch!
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