It’s Not the News – It’s the Mood

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The changing face of the Rand

As the days counted down to the end of September 2016, all was looking pretty rosy for the Rand.

It had enjoyed three weeks of gains and had all but regained the ground it had given away in the latter half of August – and was closing in on its strongest levels this year.

And the outlook was more positive still. The US Fed had decided to keep interest rates on hold, things had calmed down in the spat between the Hawks and Pravin Gordhan (for now!) and the market had just received the ‘good’ news that SAB Miller had clinched a deal in a $103bn takeover by London-based Anheuser-Busch InBev, with these inward flows expected to provide further impetus for the Rand’s positive run.

Yes, things seemed to be looking rosy – or so the local economists thought!

Because all it took was a couple of days for the headlines to change to “Rand continues puzzling decline” with mainstream pundits perplexed and confused by the seemingly inexplicable weakening back above 14.00 to the Rand – for no reason at all.

What had happened?

The Rand obviously had not been reading the news. Or perhaps those players that ‘move the markets’ had also not been keeping up to date on these positive events.

So, why had the Rand just lost 65 cents in less than 3 days?

Thinking about today’s headlines, it made me realize that economists – and conventional wisdom – would like us to think of financial markets as physical objects that merely react to Newton’s First and Second Laws of Linear Motion (remember them?)…

  1. An object in motion stays in motion with the same speed and in the same direction unless acted upon by an external (unbalanced) force.
  2. An object will accelerate in the direction of and in direct proportion to the net force acting on it.So, based on this, this past week prognosis for the Rand was easy:
  1. The Rand had been heading stronger for three weeks so unless any unbalanced force acted on it, it would continue to strengthen.
  2. There was additional good news (net force in the right direction) which should have the effect of causing the Rand to accelerate still stronger.

But the market did the opposite, which has puzzled the ‘experts’ out there. But perhaps they forgot about the fact that, IF financial markets did abide by Newton’s Laws of Linear Motion (a big IF – more on this later), then we would need to apply his Third Law too, which states:

  1. “For every action, there is an equal and opposite reaction.”

Of course, what this would mean is that news that is considered positive by one person could be perceived to have negative implications by another.

Which is very often the case. And, in fact, is exactly how I feel about the touted SAB Miller Anheuser-Busch InBev (ABI) deal.  What is positive about this deal?  Some might think a $103bn inflow is great, but let’s put this in context.

Isn’t this one this country’s prime income-generating assets? That is now being sold off to a foreigner,..meaning that all future profits will no longer be for the benefit of the local economy? And instead will add to our already swollen Services Account deficit through dividends and interest payments offshore (as all the other FDI deals have done)?

The fact is, you will always get a contrary view on any data release and news – that’s just how us humans beings are.

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