Daily Commentary - 19 March 2018 | Merchant West

Daily Commentary - 19 March 2018

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

- USD / ZAR 12.0381 - EUR / ZAR 14.7644 - GBP / ZAR 16.7617 -

Economic Events:

19 March : No Data of real importance

20 March : SA Current Account Data  ; CPI Data

21 March : US Current Account Data ; Existing Home Sales ; FED rate announcement

22 March : EC Flash PMI - SA Retail Sales  - BOE Rate Announcement  - US Initial Jobless Claims

23 March : US Durable Goods Orders

Market Commentary:

Local front:

South Africa's rand weakened against the dollar on Friday as investors took a cautious tone towards the currency ahead of rating decision by Moody's, while stocks ended the week lower as bourse heavyweight Naspers fell. At 17h00 local time, the rand traded at 11.9725 per dollar, 0.7 percent weaker than its New York close on Thursday. "The ZAR has been a little bit on the back foot recently, that tends to tell us that jitters are crippling in to the market as the Moody's review approaches," said ETM Analytics market analyst Halen Bothma.

Moody's, the only major agency with an investment grade rating on South African debt but with a downgrade review, is scheduled to make a decision by March 23.A cut to junk - following downgrades by S&P and Fitch - will see the country ejected from Citi's influential World Government Bond Index (WGBI), triggering up to 100 billion rand ($8.5 billion) in selling by foreign investors. The rand and stocks largely shrugged off news that former president Jacob Zuma would be charged with corruption over a 30 billion rand ($2.5 billion) state arms deal in the late 1990s. "It's not really a decision that was expected to influence ZAR (rand) sentiment, the market is a lot more focussed on fundamentals in terms of the fiscal path of the country," Bothma said. In fixed income, the yield for the benchmark government bond due in 2026 rose 2 basis points to 8.145 percent.

In the equities market, the All-Share index ended the week 0.18 percent lower to 58,101 points, while the Top-40 index fell 0.37 percent to 51,421.

International front:

The dollar held steady against a basket of major peers on Monday as traders braced for new Federal Reserve Chair Jerome Powell's first monetary policy meeting this week, and as the increased threat of trade protectionism kept markets on edge. Traders are also nervous after weekend polls suggested a massive drop in public support for Prime Minister Shinzo Abe over his handling of a festering cronyism scandal, which has raised doubts about his ability to press forward with his reflationary economic agenda including monetary easing.

The dollar's index against a basket of six major peers stood at 90.276.On Friday, the dollar index had hit a two-week high near 90.38, following strong U.S. economic data. U.S. industrial production surged in February, while the University of Michigan Consumer Sentiment Index rose in March to the highest level since 2004. The figures reinforced views that the global economy is enjoying strong growth and that the Federal Reserve will raise interest rates at the end of its policy meeting on Wednesday. With a 25 basis point rate hike seen as a done deal, a key focus is on whether Fed policy makers forecast four rate hikes this year in their "dot plot" projections, instead of three they had projected at a December meeting.

The prospects of more rate hikes typically support a currency because higher interest rates tend to attract funds. However, recent political headlines have drawn more attention as investors fret that U.S. President Donald Trump's tariff and other protectionist policies could disrupt the U.S. and global economy.

International data front:

U.S. industrial production surged in February, boosted by strong increases in output at factories and mines, but the economic outlook for the first quarter was dimmed by a larger-than-expected plunge in homebuilding last month. The broad-based rise in production likely reflected increased investment spending in the wake of hefty corporate income tax cuts, which came into effect in January. Economists, however, worried tariffs on steel and aluminum imports imposed by President Donald Trump last week could weigh on output. "Much of manufacturing is a user of steel and aluminum," said John Ryding, chief economist at RDQ Economics in New York. "The policy to impose tariffs poses potential risks to the broader output gain given how important trade is to manufacturing."

Industrial production jumped 1.1 percent last month, the Federal Reserve said on Friday. That was the largest increase in four months and followed a 0.3 percent decline in January. February's increase beat economists' expectations for only a 0.3 percent gain. Manufacturing output vaulted 1.2 percent, the biggest gain since October, after falling 0.2 percent in January. Production of primary metals, which include steel and aluminum increased 0.5 percent last month after jumping 1.5 percent in January. Output of fabricated metal products, which use steel and aluminum, climbed 1.6 percent in February after rising 0.4 percent in the prior month.

Officials at the Fed tend to look at utilization measures as a signal of how much slack remains in the economy — how far growth has room to run before it becomes inflationary. Capacity use at factories rose to its highest level since April 2008."It has now broken out above the 20-year average. Is this a sign of more meaningful price pressure ahead?" said Robert Kavcic, a senior economist at BMO Capital Markets in Toronto.

Our range for the day : R 11.9000 – R 12.1000