Daily Commentary - 17 November 2017

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

- USD / ZAR 14.2256 - EUR / ZAR 16.7655 - GBP / ZAR 18.8314 -

Economic Events:

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

Market Commentary:

The rand posted sharp gains yesterday which took it to post budget levels and it seems as though all the losses that flared up over free education and the ANC NEC have been unwound. There still is however enough smoke around free education to justify concern, which could mean that the rand has maybe gained enough or maybe even too much.  It has been helped by renewed dollar weakness. A risk on move across global asset classes has supported bonds yesterday, causing them to grind lower. As Treasury yields fall, the rand has tracked lower. Even though the move is encouraging, it is not enough to turn it bullish as the rating view at the end of next week is still a concern. Both Standard and Poor and Moody’s will provide a rating action on South Africa’s foreign and local currency denominated debt. The market is not pricing in a double downgrade and minor relief is expected if SA’s WIGBI status is maintained. This could however be short lived as investors look to reduce their long exposure as we head into the ANC National Conference. Tight range bound trading will characterize local markets going forward and a decent trend either way will only be evident early in next year.

For now, the situation in Zimbabwe is unknown particularly as to whether President Mugabe is out or not. Even though the situation is not having a meaningful impact on the rand for now, one must still keep in mind that it could.

Yesterday the US tax reform seemed to make progress as the House of Representatives agreed on the new version of the bill. The Senate, where Republicans have a smaller majority, remains a problem where progress is slower and faces more opposition. Betting odds on personal taxes being cut before yearend have jumped to 27% from 15%. The VIX index fell from 13 to 11 as major Wall Street indices gained for the first time in five days and odds for a Fed hike by June is now at 75%.

US industrial production for October came in stronger than expected. This shows that the economy is recovering from the hurricanes. Much of the gains came from manufacturing production of chemical, petroleum and coal products. Motor vehicles and metals also posted decent gains. Mining production fell after the hurricanes caused shut downs in oil and gas drilling. This is expected to reverse in coming months as most rig drillings have resumed.

The US dollar weakened this morning on reports that investigators have subpoenaed documents relating to Russian interference in Donald Trump’s 2016 presidential campaign.

UK retail sales for October came in above expectations at 0.3% year-on-year. This was better than September’s contraction of 0.7% year-on-year.

Eurozone CPI for October came is as expected and unchanged from September at 1.4% year-on-year. This number disappointed markets as this reflects that the transmission from strong growth to higher inflation has been slow. The Euro weakened on the back of this. This also raises the risk that the ECB will not only hold off on raising rates until after their current QE policy but also the inflation outlook being seen on a downward trend will delay tighter monetary policy.

Expected range: 14.05 – 14.40