Bad things come in threes, so they say, and this week began with expectations of (at least) a third Emerging Market domino: following Turkey’s and Argentina’s continued fall from grace. Right on schedule, South Africa stepped up, entering its first recession in nine years, then the following day bolstering the disappointment with factory output data down the most in over two years. The slowdown in the agricultural sector was a major driver of the economic weakness, but political and policy uncertainty were also major unquantifiable factors.
As if being knocked out of the ICC Champions Trophy by India wasn't enough, Moody’s has downgraded South Africa’s rating by one notch to Baa3 (with a negative outlook); both Standard and Poor’s and Fitch cut the country’s ratings to sub-investment grade, BB+, in April. Moody’s review, which started at the beginning of April, showed that although there are ‘a number of important strengths that continue to support South Africa’s credit worthiness’, a weakening institutional framework, uncertain policy and slow structural reform, and fiscal erosion are hampering growth.
Overnight, at one point the South African rand lost over 9% of its value, the biggest move since October 2008. The currency did recover, trading now down just 2.3%. At its lowest, the spot was trading at 17.9169 to the USD, before coming back to 16.51. Implied volatility for the 1 month at the money option moved up to 24.69% , a rise of 4.62%. The reason for this huge move seems to be risk aversion, poor liquidity with a combination of stops and margin calls.
In a recent report a Commodities Research Consultancy predicts that over the next 5 years China’s coal imports could fall dramatically. The independent research group Capital Economics believes that coal imports will fall to ‘virtually nothing’ by the end of this decade. In the report they say the three main factors for this fall are a slowing economy, a move to greener fuels and the government’s protection of the local mining industry. Coal imports in the first half of 2015 are already down 38 percent year on year, on track to decline by more than 80 million tons from 2014. Added to this, as we have written before, China is on a huge renewable energy push. In 2014 electricity produced from hydro rose 5.7% and nuclear power 33.9%.