Daily Commentary - 04 December 2018

Merchant West Capital Markets

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Market Data: 

04 Dec: SA GDP data | EC PPI Data

05 Dec: EC Markit PMI Composite. Retail Sales | US MBA Mortgage Applications, ISM Non-Manufacturing PMI, Fed's Powell Speech 

06 Dec: US Initial Jobless Claims, Trade Balance

07 Dec: EC GDP Data | US Change in Pvt payrolls, University of Michigan Sentiment

Market Commentary: 

Local

It is difficult for the bond market to ignore any ZAR appreciation that materialises. It will, as we have seen from the most recent fuel price decline detract strongly from inflation. As it currently stands, the inflation rate for December is expected to drop towards 4.3%, substantially below the SARB's expectations at the start of the year and below the mid-point of the 3-6% inflation target band. Many might argue that that will not be sustained given the administered price increases anticipated early in 2019 with Eskom looking for substantial relief from Nersa and municipalities likely to increase their fees to try and recoup the R17bn that they owe Eskom as well as stabilise their finances. These will be growth negative, hidden taxes but will be captured in the headline inflation data initially, only for margin squeeze and recessionary conditions to follow.

 

Therefore, unless one believes that Eskom is about to hit a calamitous wall and fail, something deemed unthinkable at this stage, persisting with overweight positions in SA's bond market still holds merit. As dire as the situation at Eskom is at the moment, and one should not downplay this, allowing the electricity monopoly to fail would be a catastrophe for the SA economy and will not be allowed. The obvious option would be to roll the debt up onto the government balance sheet and manage the fiscus from there. That risk has been flagged for some time and Eskom's woes are known, so none of this should come as much of a surprise. Whether the return to load-shedding is enough to warrant a change in attitude by the ratings agencies is debatable, but they too have been flagging the state of SOEs for some time now. Source: Investec

International

The greenback fell victim to a renewed risk-on environment on Monday as a temporary trade truce between the US and China sent investors searching for higher yields. The Dollar index, against a basket of majors, fell to a low of 96.713 before closing of 97.040. The common currency, the euro, regained some lost ground appreciating to a high of $1.1380 before closing at $1.1352. Pound Sterling fell to a low of $1.2697 before closing at $1.2722 on continued concerns surrounding the approval of the Brexit deal by the British parliament. Source Absa

Contained euphoria after the G20, with the market weary of the conflicting claimed concessions and the tweets to come that may clarify them.  $ZAR traded down to 13.58, given the country gearing towards China, however the gains subsided as we close just north of 13.70.  Feels like we should be selling into rallies given the macro environment, the surprise PMI print (49.5 v 43.5 exp'd) possibly pointing to better growth tomorrow, and with RM LHS flow at your back. All eyes on the GDP number today and could see us potentially push to lower otherwise will be go back to the 13.80 level. Source: BNP

Our range for today: R13.5500 – R13.8300