Daily Commentary - 10 November 2017

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

- USD / ZAR 14.2969 - EUR / ZAR 16.6237 - GBP / ZAR 18.7844-

Economic Events:

10-Nov : US Consumer Sentiment

Market Commentary:

Growing talks that President Zuma will soon announce free higher education coupled with lacklustre mining and manufacturing numbers has pushed the Rand 1% weaker yesterday and into a new trading range – just as we were staging a mild recovery. This raised concerns about higher spending on education as it would put further strain on SA’s budget, referring to the Herr Commission’s report that free higher education in South Africa is not even close to feasible. Times Live commented saying “According to senior government officials and ANC insiders, the report is being held back so that minister Radebe and his director-general, Mpumi Mpofu, can slice through departmental budgets across the state system to make R40bn available to implement the plan.” No wonder the DA is seeing our debt-to-GDP ratio at 80% by 2020.

Mining data came in at a big miss of -7.0% M/M while manufacturing did one worse printing -0.8% M/M for September. Note that the agricultural and mining sectors helped pull us out of a recession earlier in the year. Now with a negative print in the mining sector, the chances of SA heading back into a recession is much higher which causes all kinds of problems for us with ratings agencies, who have us under a microscope at present. SARB governor Kganyago said yesterday that the current challenges facing the SA economy won’t be difficult to turn around citing the few positives that we can lean on for now in the form of a smaller current account deficit and inflation moderation that has eased the near-term pressure on monetary pressure. A good effort to try curtail current negative sentiment around the Rand but judging by where we open today, at 14.26, it failed to offset Zuma’s comments. SA Bonds sold off yesterday in the wake of Zuma’s comments with SA’s 10 year R186 bond reaching 9.33% by mid-afternoon.

The Senate bill on tax reform released yesterday differed hugely from the House bill, implying that reconciling the versions will be time consuming and almost fully rules out a 23 November finalization. Wall Street feel sharply overnight, recovering only slightly before the close. This is Rand negative, but the effect has been more than offset by the weakness in the dollar. The US market has renewed optimism with the US bond market now factoring in rate hikes in 2018 with more conviction which has been causing the yield curve to flatten. The Greenback is thus finding its only support from this yield curve movement.

The major headline underpinning market trade is a report by the European Commission where Eurozone growth forecasts have been revised higher to 2.2% for 2017. On the inflation front, 2017 and 2018’s forecasts are sitting below 1.5%, well below ECB target rates. The main downside risk noted for prices was the Euro and its strength which causes the ECB’s inflation projection to undershoot the target rate well into late 2019.

Range: 14.20 - 14.47