Daily Commentary - 04 July 2018 | Merchant West

Daily Commentary - 04 July 2018

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

USD / ZAR 13.6249 - EUR / ZAR 15.9104 - GBP / ZAR 18.0111 -

Economic Events:

04 July: EC PMI Data - US Holiday

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 Tuesday, helped by a weaker dollar as investors awaited minutes of the U.S. Federal Reserve's June meeting and jobs data that should confirm whether policymakers will raise interest rates twice this year. At 17h27, the rand traded at 13.6750 per dollar, 1.12 percent firmer than its close on Monday. The Fed will release minutes of its June meeting on Thursday, and investors will try to gauge whether it is still on track to raise interest rates twice more this year. “While the local currency has scope to extend gains amid dollar profit-taking, the upside is likely to be limited by a combination of domestic and external factors," FXTM research analyst Lukman Otunuga said. “With global trade war fears still weighing heavily on sentiment and stimulating risk aversion, emerging market currencies like the rand are likely to continue feeling the heat."

The rand has also been hurt by weak local economic data, which has cast doubt on President Cyril Ramaphosa's ability to kick-start growth after a decade of stagnation. In fixed income, the yield for the benchmark paper R186 fell 5.5 basis points to 8.84 percent. On the bourse, the benchmark Top-40 index rose 0.6 percent to 51,287 points while the All-Share index gained 0.58 percent to 57,489 points. Gains on the bourse were seen from the bullion sector, which rose 1.15 percent on the back of a stronger spot gold price.

Moody’s on South Africa:

South Africa will find it harder to raise funds and service its foreign debt after a worsening of external financing conditions in recent months due to a fall in the rand and rising bond yields, Moody's said on Tuesday. Moody's was the last of the top three major rating agencies to rate South Africa's investment grade. In March it affirmed that rating and revised its outlook to stable from negative, citing an improving policy framework.

However, in a research note published on Tuesday it flagged potentially tougher times ahead: “Tightening external conditions can affect the overall cost of debt for the government, both through the availability and cost of external finance and if currency pressure leads the South African Reserve Bank to raise policy rates significantly. “South Africa's public debt has risen to more than 50 percent of gross domestic product over the past decade as fiscal and policy missteps under former president Jacob Zuma, including firing two respected finance ministers, which saw the country downgraded to junk by two of the top three rating firms.

While investor confidence was soothed by Cyril Ramaphosa's election as president in February, enthusiasm has waned as growth numbers disappointed and uncertainty around new land and mining policies weighed. In recent months the rand and bonds suffered in a global emerging market rout triggered by rising lending rates in the United States and fears that a spat between the U.S. and China could boil over into a full blown trade war. Data last month showed foreign investors had sold more since the start of the year than during the 2008 global financial crisis and the dot-com crash between 2000 and 2001.

Moody's also highlighted risks related to the rising share of non-resident holdings of government debt, and said that the sharp portfolio outflows were resulting in higher debt servicing costs which would hamper the country's fiscal flexibility.

International front:

China is putting pressure on the European Union to issue a strong joint statement against President Donald Trump's trade policies at a summit later this month but is facing resistance, European officials said.In meetings in Brussels, Berlin and Beijing, senior Chinese officials, including Vice Premier Liu He and the Chinese government's top diplomat, State Councillor Wang Yi, have proposed an alliance between the two economic powers and offered to open more of the Chinese market in a gesture of goodwill. One proposal has been for China and the European Union to launch joint action against the United States at the World Trade Organisation.

But the European Union, the world's largest trading bloc, has rejected the idea of allying with Beijing against Washington, five EU officials and diplomats told Reuters, ahead of a Sino-European summit in Beijing on July 16-17.Instead, the summit is expected to produce a modest communique, which affirms the commitment of both sides to the multilateral trading system and promises to set up a working group on modernising the WTO, EU officials said. Vice Premier Liu He has said privately that China is ready to set out for the first time what sectors it can open to European investment at the annual summit, expected to be attended by President Xi Jinping, China's Premier Li Keqiang and top EU officials.

Our Range for the Day: R13.5200 - R13.8000