Daily Commentary – 17 October 2018

Merchant West Financial Services Company

Contact Merchant West Capital Markets on: (+2711) 305-9500 or treasury@merchantwest.co.za

USD / ZAR 14.1927 - EUR / ZAR 16.4135 - GBP / ZAR 18.7077 -

Economic Events:

17 October:EC CPI - SA Retail Sales - US FOMC Meeting Minutes

18 October: SA Mining Production - US Initial Jobless Claims ;Continuing Claims

19 October: EC Current Account - US Existing Home Sales

Market Commentary:

Domestic front - South Africa's rand weakened in early trade on Wednesday as the dollar strengthened against most major peers, with the market awaiting domestic retail sales figures and minutes from the U.S. Federal Reserve's latest policy meeting.At 07h14, the rand traded at 14.2150 per dollar, 0.32 percent weaker than its New York close on Tuesday. “Current levels are likely to provide opportunity for dollar buyers, but if the rand consolidates at these levels, an attempt at the 14.0000 level and beyond would seem likely," Nedbank analysts said in a note. "However, the release of the FOMC minutes tonight are likely to be key."

SA's credit rating would be downgraded if state owned enterprises (SOEs) raise government's debt burden, Moody's warned. The ratings agency on Tuesday released a research report on SA government. Moody's has SA rated at Baa3, one rung above junk status, with a stable outlook. Moody's did not issue a ratings action last week Friday, as was scheduled. The rand remained resilient and on Monday strengthened on the back of the delayed ratings decision. According to the report, the challenges to the country's credit include weak SOEs, structural economic bottlenecks which are limiting growth and job creation as well as policy uncertainty stemming from "social and political divisions”. Moody’s indicated that SA's ratings would be downgraded if prospects to revive growth falter, if government cannot stabilise its debt burden and contingent liabilities from SOEs."Any crystallisation of contingent liability from SOEs that would raise the government debt burden and place it on a higher trajectory would likely have negative rating implications," the report read. “Credit constraints include elevated government debt and contingent liabilities risks from state-owned enterprises, which limit the capacity of the government to absorb potential shocks or use fiscal stimuli, as well as persistently low growth," Moody's explained. Falling revenues and a recession mean South Africa will struggle to finance public services, the National Treasury said on Tuesday, as ratings agency Moody's warned of the risks of rising government debt. Africa's most industrialised economy tipped unexpectedly into recession in the second quarter, and the appointment of a new finance minister added to currency and financial market turmoil. “The contraction of our public finances is placing tremendous stress on us and our ability to finance public services and this threatens the affordability of planned expenditure," Treasury Director-General Dondo Mogajane told a parliamentary committee. “The MTBPS will be calm on the surface but hide some furious 'kicking' below the surface to hold the line against revenue underperformance and the political pressures for a 'real' stimulus," said analyst Peter Attard Montalto of Intellidex (Reuters) International front - The dollar strengthened against most major peers on Wednesday, while the yen weakened as upbeat Wall Street earnings reduced global appetites for safe haven assets.The three main Wall Street indexes each rose by more than 2 percent as blue-chips delivered strong earnings indicating that the U.S. economic recovery is on track despite rising interest rates and global trade war tensions. Data on Tuesday showed that U.S. industrial production increased for a fourth straight month in September, boosted by gains in manufacturing and mining output, but momentum slowed sharply in the third quarter. "The rebound in global sentiment has taken the appreciation pressure off the yen," said Stuart Ritson, portfolio manager, emerging markets debt at Aviva Investors. "The Fed is close to neutrality and the FOMC will pause when the Fed funds rate gets to 2.75 percent," Brian Martin, ANZ head of global economics, said in a note. "While there are upside risks to our forecasts, we think the Fed will struggle to raise the Fed funds target much beyond 3.0 percent," he added Our Range for the day: R14.1000 - R14.4000