Daily Commentary - 25 September

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

USD / ZAR 14.3498 - EUR / ZAR 16.8889 - GBP / ZAR 18.8636 -

Economic Events:

24 September: No data of real importance

25 September: US House Price Index ; Consumer Confidence

26 September: US MBA Mortage Applications ;New Home Sales ;FOMC Rate Decision

27 September: EC Consumer Confidence - SA PPI Data - US GDP ;Initial Jobless Claims

28 September: EC CPI Data - SA Trade Balance - US University of Michigan Sentiment

Market Commentary:

South Africa's rand was on the back foot on Tuesday amid weak emerging market sentiment and with investors unimpressed by an economic stimulus package announced by President Cyril Ramaphosa last week that included no new money. At 08h45 the rand was 0.36 percent weaker at 14.3325 per dollar, having closed in New York at 14.3850.The ramp-up in trade war tensions continues to rattle investor confidence as the U.S. and China showed no signs of backing down and the escalating trade row is expected to hit global economic growth. Investors remain skittish on the rand following the announcement of a stimulus programme that will see a reallocation of the budget but does not involve an injection of new cash.

International trade - A senior Chinese official said on Tuesday that it is difficult to proceed with trade talks with the United States while Washington is putting "a knife to China's neck", a day after both sides heaped fresh tariffs on each other's goods. When the talks can restart would depend on the "will" of the United States, Vice Commerce Minister Wang Shouwen said at a news conference. Separately, the Chinese government's top diplomat told businesspeople at a meeting in New York that talks could not take place against the backdrop of "threats and pressure", the Foreign Ministry said. Certain forces in the United States have also been making groundless criticisms against China about trade and security issues, which has poisoned the atmosphere for Sino-U.S. ties and is highly irresponsible. "If this continues, it will destroy in an instant the gains of the last four decades of China-U.S. relations," Wang told members of the U.S.-China Business Council and National Committee on United States-China Relations.

U.S. tariffs on $200 billion worth of Chinese goods and retaliatory taxes by Beijing on $60 billion worth of U.S. products including liquefied natural gas (LNG) kicked in on Monday as the trade dispute between the world's two biggest economies escalated, unnerving global financial markets. China also accused the United States of engaging in "trade bullyism", and said Washington was intimidating other countries to submit to its will, according to a white paper on the dispute published by China's State Council, or cabinet, on Monday. "The sharp criticism (from Beijing on Monday) suggests that China might prefer to wait out the current U.S. administration, rather than embarking on potentially futile negotiations," Mizuho Bank said in a note to clients.

"Given these developments, it is increasingly likely that both sides will not resume negotiations for some time, at least until there is a noticeable shift in the political mood on either side." Several rounds of Sino-U.S. talks in recent months have appeared to produce no breakthroughs and fresh negotiations which had been expected in coming weeks have been cancelled after Beijing reportedly decided late last week not to send a delegation to Washington. One cannot say that all previous trade discussions have been useless, but the United States has abandoned its mutual understanding with China, Wang said.

 

FX Markets  - USD weakened last week (-0.8%) though year-to-date strengthening continues (+2.2% YTD), as renewed tensions between the US and China further reinforced the USD outperformance narrative. Moreover, further divergence in ECB dovish tone and the FED’s policy tightening alongside recent fears that the turmoil in EM (particularly South Africa, Turkey and Argentina) could spill over into the global economy, continue to increase risk averse sentiment for EM/FM assets. In the medium-term, market concern over shrinking USD liquidity as the Fed unwinds its bond portfolio is likely to weigh on US fiscal deficits and therefore on the dollar.

EUR appreciated last week (+1.1%) as uncertainty surrounding the Italian budget is fading into the background. However, the weaker-than-expected September Eurozone PMI readings remains a downside risk to economic growth, keeping the euro low. Although the ECB started to reduce its asset purchase programme by half this month and expressed its ambition to stop it by year-end, no rate hike is likely before H2 2019, revealing a very cautious monetary stance, and adding pressure on the EUR.

Outlook - Reflation and business confidence in the Euro area continue to be closely monitored for the ECB to end its asset purchases programme; as announced earlier this year, the QE has been reduced by half this month (from EUR30bn to EUR15bn) and should stop by year-end.   However, ECB guidance over rate hike remains very cautious as no timetable for rate hike is expected before mid-2019; thus, suggesting the accommodative stance will last for longer in the Eurozone and this could drive short term EUR softening, especially with the prospect of further rate hikes in the US.

Our Range for the day: R14.2500 - R14.5000