Daily Commentary - 14 November 2017

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

- USD / ZAR 14.4740 - EUR / ZAR 16.9182- GBP / ZAR 18.9772 -

Economic Events:

14-Nov: UK CPI - EC Industrial Production ; GDP SA  - US PPI Final Demand

15-Nov : SA Retail Sales Constant - US CPI

16-Nov : EC CPI - US Initial Jobless Claims ;Industrial Production

17-Nov : EC ECB's Draghi Speaks in Frankfurt - US Housing Starts

Market Commentary:

Yesterday the rand tumbled more than 1% after the Presidency confirmed the resignation of Top Treasury official Michael Sachs. It tumbled to 14.5425, its weakest level since 18 November 2016. Until its release, the Heher Commission of Inquiry report also weighed on the rand but left it little changed after its publication. SOE’s are still in the spotlight with Eskom short on cash reserves and may have difficulty funding salaries at the start of the New Year. Eskom has said that it is not insolvent but faces liquidity issues. Petro SA is added to the list and there are many others that further bolster the level of unfunded liabilities which lurk in the wings. Needless to say SAA’s financial troubles are far from resolved as are the SABC’s. These all pose a massive risk to the country as they all exist outside the figures captured in the budget. Let’s also bear in mind that over and above the free education debacle, there are rumours that the nuclear deal may still be in the offing all against the backdrop of a massively constrained government fiscal position. These factors have heightened the risk of downgrades of SA’s local currency ratings which are due on 24 November.

Yesterday reports that ANC Secretary-General Gwede Mantashe was under pressure to step down, also weighed on the rand. This was later denied by the ANC.

As we head closer to the elective conference in December, there is very little to feel optimistic about, with Zuma exerting his presidential authority with greater conviction than he has done before. Clearly he is up for a fight and is acting like a president that will not vacate his position post the December conference. If this is the case, there is no telling how much damage will be done to the economy from now until he vacates his position.

Judging from the current depressing state of affairs, it is understandable how portfolio flows have dried up. The rand however needs portfolio flows to remain supported but these are expected to remain absent as the next five weeks of uncertainty continues. A point to note is that a Ramaphosa win in December could trigger a very strong rally as those positioned for more bad news capitulate.

Globally markets will eye inflation numbers this week as US, UK and Eurozone CPI numbers are released. Oil prices are hovering round two year highs as markets appear to be gearing up for a reflation theme. If inflation numbers sustain their upward trends, it will signal tighter monetary policy globally and keep Emerging Markets, including the rand, on the back foot.

In the US President Donal Trump tweeted some suggestions concerning the proposed tax bill which were different from the two Republican plans being considered. He tweeted that the mandate repeal be pushed forward and that the top earners tax be cut to 35% from its current 39.6%. Republicans will push ahead with the bill which is currently being considered by a Senate panel.

The pound was weighed down yesterday as the UK Sunday Times reported that 40 members of Prime Minister May’s party was willing to sign a motion of no confidence against her. A leadership contest would require only 8 more members to sign the motion. This resulted in market fears that Brexit negotiations were not progressing.

China’s industrial output cooled last month, while fixed asset investment and retail sales grew slower than expected, suggesting the economy may be losing some steam as the government cracks down on debt risks and pollution.

Expected range : 14.25 – 14.55