Daily Commentary – 23 November 2018 | Merchant West

Daily Commentary – 23 November 2018

Merchant West Financial Services Company

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

USD / ZAR 13.7944 | EUR / ZAR 15.7447 | GBP / ZAR 17.7520 |

Economic Events:

23 November: GE GDP Data | EC Manufacturing PMI | US Markit US Manufacturing PMI

Market Commentary:

SARB provides catalyst for ZAR appreciation, more to come. It was a close decision, described by one deputy Governor as “a tough one” and judging by the statement delivered by Governor Kganyago, there was a clear attempt to justify the move and portray it as the right thing to do as opposed to describing the status quo which may have led to a different outcome. The SARB had time to wait, but quite clearly, they chose to draw inspiration from their models that continue to point to the risk of volatility through 2019 and the upside risk to inflation. It was a very pre-emptive move and one which the SARB might have to justify for a while still before the longer-term volatility of which they speak manifests. The reaction from the market was however a touch more predictable and goes some way to confirming that the protection of the value of the ZAR is at the forefront of the SARB’s decision making. ZAR appreciation was indeed a welcome response and one that will largely help offset the effects of the higher interest rates, which in the broader scheme of things was not significant and would barely make a difference to the economy given how much risk had already been priced into SA markets. One simply has to look at the manner in which the FRA curve flattened, how the IRS curve was received sharply lower, how bonds rallied and the ZAR gained ground to appreciate that the economy is now dealing on average, with lower interest rates than they were yesterday morning. Ironically, this rate hike decision may turn out to be a positive growth development for the SA economy if it indirectly helps to ease the pressure on household finances by boosting disposable income through a ZAR induced, softening in inflation.

Asian shares slipped on Friday as trade tensions continued to hurt sentiment, while weak corporate earnings in Europe added to worries about global growth and outweighed hopes for progress in Brexit negotiations. With U.S. markets closed overnight for Thanksgiving and Japan on holiday on Friday, trading activity was muted. Regional indicators turned lower after China’s markets opened. MSCI’s broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS fell 0.2 percent, giving up early, small gains as Chinese blue-chips dropped 1.4 percent and the Shanghai Composite index lost 1.6 percent. China’s markets have been stuck in a slump as the country’s trade war with the U.S. has exacerbated worries about slowing growth. Few analysts expect sustained improvement for Chinese shares even if U.S. and Chinese leaders make progress in mending ties at a G20 meeting in Argentina at the end of the month. At this stage, some economists doubt the G20 talks will bring progress. U.S. equity futures were pointing to weakness on Wall Street when trading resumes Friday. S&P E-mini futures ESc1 were down 0.27 percent at 2,641.75 On Thursday, stock markets in Europe were hit by disappointing earnings on further signs that corporate profit growth is peaking globally. Those earnings underscored the lingering anxiety among equity investors as trade tensions, slowing global investment and growth kept stock markets on the back foot after a torrid October. A draft deal between Britain and the European Union on future relations reached late Thursday did little to lighten the mood.

The euro and sterling edged higher against the dollar on Friday after Britain and the European Union agreed a draft text setting out their future relationship before a summit on Sunday. Traders were cautiously optimistic about the draft declaration agreed by the United Kingdom and the European Commission which outlined how the trading relationship, security and other matters will work once the divorce is finalised. The euro and sterling traded marginally higher on Friday, having advanced overnight by 0.2 percent and 0.8 percent respectively. Traders are still waiting for more clarity around the Brexit deal as it faces a rocky ride once it reaches a deeply divided British parliament, with hard-line euro-sceptic and staunch pro-EU factions, and various shades of grey in-between.

USD/ZAR Range for the day: R13.6000 – R13.9000