Daily Commentary - 11 July 2017

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

- USD / ZAR 13.5928 - EUR / ZAR 15.4891 - GBP / ZAR 17.5366 -

Economic Events:

11-July: SA Manufacturing Production

12-July: EC Industrial Production - US FED releases Beige Book

13-July: SA Mining Production - US PPI ; Jobless Claims

14-July: US CPI ; University of Michigan Sentiment

Market Commentary:

Yesterday the Public Protector said that she will not oppose a court challenge against her binding proposal calling for a change of mandate of the central bank. Even though this was unlikely to pass constitutional muster, her decision reflects not only the legal issue but also the political pushback. The proposal by the ANC to nationalise SARB will also be rejected in December, making its independence and mandate safe for now. This seemed to have caused quite a big reversal in the rand in the morning but it then weakened dramatically in the afternoon. USDZAR is now marginally above the 200 day moving average, and its weakness seems country-specific rather than broad based EM weakness.

At the ANC policy conference last week, Health Minister Aaron Motsoaledi put forward a proposal that money allocated for tax rebates on medical aid be used to fund the National Health Insurance. The tax rebate was not an additional tax, but money taxpayers were able to claim. This would affect consumption expenditure as consumers will not get their tax rebates back. The ANC has confirmed that it supports the proposal and is looking to finalise the NHI by the end of the current term.

The policy conference also confirmed that the ANC will take measures to improve access to free higher education for poor South Africans and the ‘missing middle’. They would try to seek help from the private sector and additionally, implement a new financial support model, where academically strong students could receive full subsidisation for their tertiary studies. This, however, is subject to the availability of funds.

Overnight Eskom announced that it will indefinitely delay the release of its integrated annual results which were scheduled to be announced today. Eskom most recently drew the ire of external auditors over financial irregularities under both its recent CEOs. The Chairman of the Board, who had been implicated in the state capture debacle, also abruptly resigned after parliament said it would launch an investigation into state capture issues. It seemed he was afforded some protection by the Public Enterprises Minister to be able to leave so quickly and this was an indication that something major was happening within the SOE. Ratings agencies have flagged the fiscal risks associated with SOE implicit and explicit guarantees as major factors weighing on SA’s credit rating outlook. Should the news on this front worsen we should expect SA’s risk premium in general to rise in tandem with the prospect of a downgrade to full-blown junk status and concomitant exclusion from benchmark indices.

Today South Africa awaits the release of manufacturing data for May which is expected to be weak and will put the rand under some more pressure.

Tomorrow and Thursday, Federal Reserve Chair, Janet Yellen, will give testimony to Congress about the outlook for policy and the economy. The theme among central bankers has been of a less accommodative nature in terms of policy rates and easy money. Investors will focus on her views regarding interest rate policy and when the bank plans to start winding back its balance sheet. A top US central banker said that he still expects one more rise interest rates this year and a start to unwinding its massive balance sheet in the next few months.

Expected range : 13.45 – 13.75