Daily Commentary – 25 October 2018 | Merchant West

Daily Commentary – 25 October 2018

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

USD / ZAR 14.5668 - EUR / ZAR 16.6205 - GBP / ZAR 18.7982 -

Economic Events:

25 October: SA PPI - EC Interest Rate Decision - US Advanced Goods Trade Balance and Initial Jobless Claims

26 October: US GDP and University of Michigan Sentiment

Market Commentary:

Well the market did not like the budget speech from Tito yesterday, with ZAR getting to a low of 14.15, then hitting 14.60 in the late session - after the disappointment. It feels like we are on way to fully pricing in a negative outlook from Moody’s on Friday after today's destructive 3.3% move.  If that outlook downgrade doesn't materialize (and we don't expect it to), we'll consolidate todays move down to the 14.20's. (BNP Paribas)

Focus will turn to the Investment Summit being held in Sandton that begins today and the Constitutional Review Committee that will review whether Section 25 of the constitution needs amending. Section 25  deals with the much hotly debated issue of repossession of land without compensation in order to facilitate the ANC’s agenda of land reform. These important events might have a effect on SA's financial markets. After yesterday’s MTBPS SA markets are in need of some good news to help offset the gloomy fiscal numbers that were announced during the MTBPS yesterday.

MTBPS KEY MESSAGES

- Finance Minister Tito Mboweni’s maiden budget update sent mixed messages and can be viewed as a pre-election budget, in our view.

- Fiscal consolidation had to be put on the back-burner given an ZAR80bn downward revision in revenue as maladministration at the revenue service came back to haunt.

- The main budget deficit is forecast to widen 0.5pp to 4.3% of GDP in FY18-19, remaining stable over the medium term.

- Expenditure ‘reprioritisation’ shifts around underspending in non-critical government programmes/departments and using existing grant funds to fund infrastructure projects.

- Debt levels rise more substantially medium term, though these manage to just stay below the 60% of GDP threshold. A cumulative ZAR50bn in upward adjustments to the state’s funding cost burden since 2014 is a concern.

- Markets and rating agencies are unlikely initially to take kindly to the MTBPS, though we still think that credit ratings risk by Moody’s will be delayed until after the 2019 budget. (BNP Paribas)

In a slight positive note, SA CPI came out unchanged yesterday at 4.9%. This supported the view of an  unlikely rate hike by the SARB. Lower interest rates will be key in stimulating the much needed growth in South Africa. Today  continues with a number of  market moving events, SA PPI data, ECB Interest rate decision and Turkey interest rate decision.

Range for the day: 14.4500 – 14.8000