Rand, Stocks Hit as Virus and Rating Fears Bash South Africa

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South Africa’s rand headed for a near-four-year low, stocks entered a correction and bonds slumped as concerns about a looming credit-rating downgrade to junk compounded fears about the effect of the coronavirus on the country’s economy.

The stampede away from risk assets hammered commodities from oil to copper and iron, driving the Bloomberg Commodity Index to a 33-year low amid rising fears demand for raw materials will be crushed as the virus weighs on global growth. China, the epicenter of the disease, is the biggest buyer of South African commodity exports.

“Emerging-market currencies are the conduit for fear” about the effect of the virus, said Nema Ramkhelawan-Bhana, an analyst at Rand Merchant Bank in Johannesburg. “The rand’s losses are unceasing, with no apparent anchor or mid-point.”

The rand weakened for a fifth day on Friday, falling as much as 1.4%. It was 1.1% weaker at 15.6531 per dollar as of 5:05 p.m. in Johannesburg, the lowest on a closing basis since May 2016. Yields on benchmark 2030 government bonds soared 27 basis points to 9.09%, after foreign investors dumped the most securitieson record yesterday. South Africa’s sovereign spread — the premium investors demand to hold the country’s dollar bonds rather than U.S. Treasuries — widened 14 basis points to 378, the most since June 2016.

“Markets have been roiled by a new wave of risk aversion,” said Simon Harvey, a London-based currency strategist at Monex Europe. “We have been calling for heightened volatility in FX markets and today we finally have it.”

South Africa’s benchmark stock index slid 4.5% at the close, extending the decline since Monday to almost 11% and setting it on course for the worst week since 1998. The gauge has retreated more than 13% from its January high, pushing the market into a correction. The latest slump has dragged the 14-day relative strength index for the FTSE/JSE Africa All Share Index to 21, well below the level of 30 that signals to some technical analysts that the selling may be overdone.

Moody’s Investors Service on Thursday described South Africa’s fiscal risks as “elevated,” raising concern the country is heading for a downgrade to junk. The ratings company, which is reviewing South Africa’s Baa3 assessment next month, said the government will find it hard to achieve spending cuts mooted in the budget, including a reduction in the wage bill that’s opposed by labor unions. Even with the spending cuts, government debt will continue to climb over the next three years as weak economic growth curbs tax collections, Finance Minister Tito Mboweni said on Wednesday.

The coronavirus has struck at a time when equity markets had registered strong performances and has “crushed expectations,” said Peter Takaendesa, a money manager at Mergence Investment Managers in Cape Town. South African stocks have retreated 7.9% this month, poised for their worst such decline since February 2009.

The domestically focused, so-called South Africa Inc. portion of the stock market has been trading at low valuations, with many major companies at five-year lows or worse, Peter Little, a Johannesburg-based money manager at Anchor Capital, said in a note shared on Twitter. “The South African market will follow the rest of the world down, but some once-in-a-decade opportunities are surfacing. Our analysts are hard at work firming up the buy-list … but we are not in a hurry!”

— With assistance by Colleen Goko

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