Daily Commentary - 02 July 2018

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

USD / ZAR 13.4578 - EUR / ZAR 15.6721 - GBP / ZAR 17.8243 -

Economic Events:

02 July: No data of real importance

03 July : EC PPI Data ; Retail Sales - US Factory Orders

04 July: EC PMI Data

05 July: UK Initial Jobless Claims ; PMI Data

06 July : US Non-Farm Payrolls ;Average earnings ; Trade Data

Market Commentary:

Local front:

South Africa's rand firmed on Friday as the dollar fell, but was on track for a weekly loss as escalating global trade tensions and concerns over the health of the local economy weighed on sentiment. On the stock market, shares rose for a second straight session, led higher by banking stocks. At 17h20, the rand was trading at 13.7175 per dollar, 0.4 percent firmer than its close on Thursday. The currency, which slipped to a 7-month low on Thursday, was however on track to end the week 2 percent weaker, according to Thomson Reuters data. The rand, like its emerging market peers, had been hurt by fears of a global trade war.

Trade tensions are set to remain high, with the U.S. administration due to activate tariffs on Chinese goods worth $34 billion on July 6, which is expected to prompt a tit-for-tat response from Beijing. Locally, a stalemate in wage talks between power utility Eskom and labour unions has added to bearish sentiment. Eskom on Thursday raised its wage increase offer to 6.2 percent from 4.7 percent previously. "The rand is taking the biggest bashing among emerging markets currencies due to poor economic growth, unfavourable financing needs and wage talks at Eskom," Rand Merchant Bank analyst Isaah Mhlanga said in a note.

In fixed income, the yield for the benchmark paper due in 2026 fell 10 basis points to 8.835 percent. The blue-chip Top 40 index was up 3.49 percent to 51,516 points, while the all share index was up to 3.25 percent to 57,610 points. Financials were in demand with the banking index up 4.65 percent. FirstRand Bank Group rose 5.95 percent to 63.89 rand followed by Rand Merchant Bank which gained 5.09 percent to 75.84 rand.

Rand view:

The Rand has been the worst performer relative to peer EM peers over the month, losing 7% against the US Dollar. We believe that the relative underperformance of the Rand is partly due to the following concerns by market participants: 1) deterioration of external vulnerability metrics, such as the recent disappointing current account deficit data which widened from 4.8% of GDP (vs. 2.9% 4Q17) 2) uncertainty surrounding the mining charter and land expropriation without compensation as potential impediments to SA’s credit rating trajectory and effectively investment-led growth and 3) high sensitivity to EM outflows as SA government bonds continue to be one of the most widely owned EM bonds by foreign investors relative to EM peers.

We still believe that the Rand (and EM currencies more broadly) are set to enter a brief phase of consolidation and relief after almost four consecutive weeks of rand weakness and as the US Dollar Index struggles to break above the key technical level of 95 on a sustainable basis. Our tactical target for the Rand is 13.50, with a secondary target of 13.10 (Nedbank)

International front:

The euro slipped back in early Monday trade after German Chancellor Angela Merkel was dealt a fresh blow when her interior minister offered to quit in an escalating row over migration policy. Interior Minister Horst Seehofer, who has called for tougher border controls, said he was ready to step down as minister and as chair of his Christian Social Union (CSU), junior coalition partner in Merkel's government.

While the euro initially rose to as high as 1.1698 against the Greenback in a knee-jerk reaction to the news, it quickly lost steam as Seehofer's departure would be seen as making Merkel's future even more uncertain. The common currency last stood traded at 1.1657, down 0.28 percent from late U.S. trade on Friday. Against the safe-haven Swiss franc, it fell 0.1 percent to 1.1560 franc EURCHF. The euro had gained on Friday after European Union leaders hammered out an agreement on migration that investors hoped would eased pressure on Merkel. The dollar extended its gains against the yen to hit a fresh six-week high of 111.04 Yen. The Japanese currency was unmoved by the Bank of Japan's tankan business sentiment survey, which showed a slight dip in big Japanese manufacturers' sentiment. The dollar has been supported by the relative strength of the U.S. economy and the prospects of further rate hikes from the Federal Reserve.

Data on Friday showed so-called core personal consumption expenditures (PCE) price index, the Fed's preferred gauge of U.S. inflation, rose 2.0 percent from a year earlier, the biggest gain since April 2012. That kept alive expectations that the Fed will raise rates at least once and possibly twice by the end of year. Yet investors are also becoming wary of possible disruptions from the trade disputes triggered by U.S. President Donald Trump's protectionist "America First" policy.

While economists expect the direct economic damage from those tariffs to be relatively contained, at least for now, many see the reversal of globalisation could have negative repercussions for many years to come, lowering companies' longer-term growth expectations. Fears of a trade war have already knocked Chinese shares to two-year lows, and buffeted the yuan last week. The yuan, which posted its biggest monthly fall on record last month, was little changed at 6.6435 per dollar in the offshore trade, off Friday's seven-month low of 6.6522 to the dollar. “The Chinese authorities do not seem to have tried to stem the yuan's fall, which many people take as a message from Beijing that that's one thing they could do against U.S. pressure on trade," said Bart Wakabayashi, Tokyo branch manager of State Street Bank.

Our Range for the day: R13.6500 - R13.9500