South Africa’s political leadership is being taught a very hard lesson in risk management. Although always noticed, poor policy decisions and general economic mismanagement are rarely punished during normal times. Those channelling capital in global financial markets have far more to occupy themselves with than dissecting micro events in an economy generating under half a percentage point of global GDP. But when winds turn icy for Emerging Markets generally, as happened this month, those past missteps become the excuse desk jockeys need to trigger a major sell-off. After running in the middle of the pack, the Rand has suddenly become the lightning rod for Emerging Market currencies. The currency collapsed over the weekend to almost R13.50 against the US Dollar; R21 to the Pound and over R15 to the Euro. A month ago the comparisons were R12.60; R19.50; and R13.90. The decline in the currency makes all South Africans poorer. An appropriate approach, naturally, is for leadership to reduce the risk of such a sell-off by acting sensibly all the time. So that when conditions turn, as they always do, the impact is muted. The citizens of any country practicing economic idiocy always get punished. That’s one of the great services of global markets. Painful as it is for those who live under poor economic management. – Alec Hogg
By Lilian Karunungan
(Bloomberg) — South Africa’s rand tumbled the most since 2011 on concern the plunge in commodity prices will deepen as China’s economy slows.
The currency of Africa’s most-industrialized economy led declines in emerging-market exchange rates, hurt by lower prices for resources that account for more than half of its exports. Losses have been exacerbated by concern over growth in China, the top destination for South Africa’s raw materials, and the prospect of higher U.S. interest rates.
The rand is among the “commodity-linked, high-yielding currencies where a lot of foreign funds were parked,” said Nizam Idris, Singapore-based head of foreign-exchange and fixed- income strategy at Macquarie Bank Ltd. “A lot of these flows are being reversed right now. Lower Chinese growth means weaker demand for commodities as they are the world’s largest consumer of raw materials by far.”
The rand weakened 3.3 percent to 13.41 a dollar as of 12:18 p.m. in Singapore, the most since September 2011, data compiled by Bloomberg show. It fell to 14.07 earlier, the lowest on record, and has dropped 14 percent this year.
China’s surprise devaluation of the yuan on Aug. 11 has roiled global markets and reinforced concern of a steep slowdown in the world’s second-largest economy. The Bloomberg Commodity Index, which tracks 22 raw materials, slumped to its lowest level since 1999 on Monday.
Devaluations by Vietnam and Kazakhstan are adding more pressure on central banks from South Africa to Kenya, which have taken aggressive action this year to bolster their currencies.
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‘Vicious Cycle’
A rebound could be in the offing as the rand’s slump has pushed its 14-day relative-strength index above the level that indicates it’s oversold. The RSI climbed to 81 on Monday, the highest since May 2013 and above the 70 level that some traders see as a sign the currency has depreciated too much, too fast.
Even so, the slide underlines the challenges faced by President Jacob Zuma’s administration in reigniting investment and growth in an economy running an electricity shortage and persistent fiscal and current-account deficits. South Africa faces more than 60,000 job losses this year in industries ranging from mining to aviation, according to a report by the Solidarity labor union.
“It’s a vicious cycle for commodity-related currencies like the rand as weak commodity prices would feed into weak jobs market, weighing on the economy,” said Tarsicio Tong, a currency trader at Union Bank of Taiwan in Taipei. “It’s hard to see any strong rebound for now.”
Emerging Markets routed, stocks hit hardest in two years
(Bloomberg) — The rout in emerging-market assets deepened amid a global selloff, sending stocks toward the biggest drop in two years and a currency gauge to a record low.
The MSCI Emerging Markets Index tumbled 3.8 percent to 781.50 at 11:40 a.m. in Hong Kong, its seventh day of losses. The Shanghai Composite Index sank 8.5 percent, while equity gauges in the Philippines, Taiwan and Indonesia slumped more than 4 percent. South Africa’s rand slid the most since 2011 and Malaysia’s ringgit declined 1.6 percent as commodity prices dropped to a 16-year low. A gauge of developing-nation currencies slid for a 10th day.
More than $5 trillion have been sliced from the value of global stocks since China’s shock devaluation of the yuan that spurred weaker currencies across developing nations and fueled capital outflows amid speculation the slowdown in the world’s second-largest economy is worsening.
“Sentiment is very poor as slumping oil prices and weakening currencies are battering emerging markets,” Komsorn Prakobphol, an investment strategist at Tisco Financial Group Pcl, said by phone in Bangkok. “Investors shouldn’t rush into buying equities as the poor sentiment makes it very hard to predict whether we have already reached a bottom.”
Taiwan, Brazil and Indonesia entered a bear market last week as the developing-nation gauge on Friday slid below a level that had supported prices since October 2011, ending a pattern that technical analysts call a “channel” in favor of bears.
Valuations Drop
MSCI’s emerging-markets index has fallen 18 percent this year and trades at 10.2 times projected 12-month earnings, the lowest since March 2014, according to data compiled by Bloomberg. The MSCI World Index has lost 3.6 percent and is valued at a multiple of 15.3
The Bloomberg Commodity Index, which tracks 22 raw materials, lost as much 1.1 percent as China’s economic slowdown exacerbates gluts of everything from oil to metals. Brent crude slid below $45 a barrel Monday for the first time since 2009 after Iran vowed to raise supply at any cost to defend market share.
All 10 industry groups in the MSCI gauge fell, led by technology and industrial companies. Taiwan Semiconductor Manufacturing Co. sank 5.4 percent as the Taiex Index slumped 5.4 percent. Indian shares dropped 3.1 percent, set for the largest drop since September 2013.
The Shanghai Composite erased its gains for the year, as government support measures failed to allay investor concerns that the slowing economy is deepening. Hong Kong’s Hang Seng China Enterprises Index plunged 6.5 percent.
The rand led declines in emerging-market exchange rates, hurt by lower prices for resources that account for more than half of its exports. The ringgit weakened to the lowest level since August 1998.
