Daily Commentary - 05 September 2018 | Merchant West

Daily Commentary - 05 September 2018

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

USD / ZAR 15.5933 - EUR / ZAR 18.0099 - GBP / ZAR 19.9921 -

Economic Events:

05 September: SA Standard Bank SA PMI - EC Retail Sales - US Trade Balance

06 September: SA Current Account Balance - US Initial Jobless Claims ;ISM Non-Manufacturing Index

07 September  :EC GDP data - US Change in Nonfarm Payrolls ;University of Michigan Sentiment

Market Commentary:

Local front - South Africa's rand fell further against the dollar on Wednesday, extending a steep fall from the previous session, as the economy entered recession. At 09h10, the rand traded at 15.5400 versus the dollar, 1.2 percent weaker than its close on Tuesday. The rand has also been pressured by a risk-off mood that has swept through global markets in the wake of financial turmoil in Turkey and Argentina. Emerging market currency peers like the rouble also dropped against the dollar on Wednesday.

The rand extended the worst decline among emerging-market peers as data showed South Africa's economy had slipped into a recession for the first time since 2009. Stocks and bonds also fell.The rand weakened more than 3% after data showed gross domestic product unexpectedly contracted in the second quarter, raising the nation’s risk profile at a time when emerging-market assets are under pressure from a rising dollar and global trade tensions. It also increases the chance of a credit downgrade by Moody’s Investors Service, which would plunge the country’s local-currency debt into junk status. “Equities, bonds, rands... It’s awful,” said Abri du Plessis, a portfolio manager at Gryphon Asset Management in Cape Town. “I’m struggling to see any light. There is now a distinct possibility that there will be a downgrade by year-end and we won’t see the end of it for South Africa’s markets.”

The rand weakened to R15.34 to the US dollar, and by 15:34 it was trading down 3.06% at R15.31 in Johannesburg. The yields on benchmark 2026 government bonds climbed 18 basis points to 9.19%, the highest level since December. The benchmark stock index fell 0.8%, spurred by a 2.9% slump in the banking gauge as lenders including Absa Group and FirstRand fell. General retailers tumbled 3.2%, led by declines in the Foschini Group and Truworths International.

“We’ve got financials and banks under quite a lot of pressure, also South African credit retailers leading the fall,” said Michele Santangelo, equity research director at Independent Securities. “On the industrial side, we see the more South African-economic-centric businesses also under pressure. ”The recession complicates the South African Reserve Bank’s policy path as the consumer inflation rate creeps toward the upper limit of its inflation target. Weak growth makes it more difficult to raise interest rates, leaving the rand even more vulnerable at a time when developing nations are tightening policy.The central bank “faces a major dilemma of whether it should raise rates due to rising inflationary pressure from a weaker currency or refrain from doing so due to very weak economic activity,” said Piotr Matys, a London-based emerging-markets strategist at Rabobank. The contraction “keeps the bias firmly skewed” to rand weakness, he said (Fin24)

International front - The U.S. dollar edged lower against a basket of currencies on Wednesday, and an Australian dollar that had been languishing at its weakest levels since mid-2016 gained after Australia posted its best economic growth in six years. The dollar's losses against other currencies were largely limited as investors stayed loyal to the safe-haven greenback due to wariness ahead of a looming deadline in the trade conflict between the United States and China.

A survey released overnight showing U.S. manufacturing activity at a 14-year high in August reinforced expectations for rising U.S. interest rates, also underpinning the dollar and helped U.S. Treasury yields rise to three week highs. Still, the dollar index, which measures the U.S. unit against a basket of six currencies, was down 0.1 percent at 95.337 as of 06h17, not far off a two-week high of 95.737 reached during the previous session.

The euro was 0.16 percent higher at 1.1599 against the greenback, and the British pound was up 0.1 percent at 1.2864.The dollar's losses remained limited as the public comment period on new tariffs on $200 billion more of Chinese imports was set to end on Thursday, whereupon U.S. President Donald Trump could follow through on plans to impose the levies, though it is unclear how quickly that could happen. “Trump does what he says he'll do in one form or another, so I expect tariffs will be implemented," said Ayako Sera, market economist at Sumitomo Mitsui Trust Bank (Reuters)

Our Range for today :R15.3500 - R15.8500