Daily Commentary - 27 November 2017

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

- USD / ZAR 13.9841 - EUR / ZAR 16.7021 - GBP / ZAR 18.6585 -

Economic Events:

27-Nov : US New Home Sales

28-Nov : No Data of real importance

29-Nov : EC Business Confidence - US GDP

30-Nov : SA PPI and Balance of Trade - US Initial Jobless Claims

01 Dec : SA New Vehicle Sales - EC Markit Manufacturing PMI - US ISM Manufacturing PMI

Market Commentary:

S&P downgraded SA’s local currency rating from BBB- to BB+ on Friday evening while Moody’s placed us on negative watch almost simultaneously until February’s fiscal budget is presented.  Because of this downgrade, SA’s debt has been excluded from the Bloomberg Global Aggregate Index which means that SAGB outflows of up to $3.8bn over the coming weeks.  The damage is still to be done and the only thing that could help the SA Economy in the short term would be for a favourable, i.e. negative Zuma outcome at the ANC elective conference in December, but sadly calls for the Rand to trade as high as 14.60 against the Greenback by year end are coming in thick and fast.

The Rand gave up about 28 cents after the announcement, weakening from 13.87 to 14.16 in a matter of minutes.  The pair has since pulled back slightly to 14.07 as traders take some profit but the underlying weakness is still perceived to push the Rand much higher through the week.  Volatility is most likely to play quite a large role in the coming weeks with 20 cent moves daily a regular occurrence.  Our R186 10 year Government Bond pretty much mirrored the Rand after the announcement, weakening from 9.33 to 9.43 immediately after, but has continued to sell off and is currently trading at 9.435.  Analysts have pointed out that R186’s could trade as high as 9.75 by mid-2018.

In response to the rating announcements, the National Treasury issued a statement that promised further fiscal adjustment measures to be unveiled in the 2018 budget.  The Statement argued that additional spending cuts or tax increases of R40bn would be required from 2018/19 in order to stabilize public debt below 60% of GDP over the next decade.  The statement said that “Over the next two weeks, the PFC and Cabinet will consider a package of measures to this effect to be implemented in the 2018 Budget.”  It also seemed to stand against free tertiary education for all students, saying instead that measures to improve access to tertiary education would be implemented in a phased matter.

The Dollar ended last week’s trading on the back foot as dovish Fed minutes rowed back expectations for US interest rate hikes.  While most board members see the Fed raising borrowing costs next month, official records of their October meeting indicate some are becoming increasingly concerned about persistently low inflation as well as high equity prices.  Concern around stagflation if the Fed raises rates too fast caused the Greenback to lose ground against all Majors on Wednesday, not fairing too much better into the close of the week.

We’ve seen the Euro has firmed aggressively again the dollar over the weekend having climbed back well above the 1.1900 level again, a really big turnaround considering that on the 7th Nov. it had dipped to 1.1560.  The market will be watching the data again in both the U.S. and the Eurozone very closely over the next two weeks as we close in on the last Non-Farm Payroll figure for 2017 i.e. Friday the 8th Dec.

Again expecting a very volatile day and believe a very wide trading range makes sense.  The dollar weakness is likely to help the EM currencies (Rand included), but the S&P and Moody announcement(s) didn’t do much to bring confidence back into our Market    -

Our Range for the Day   :-      R13.9300  -  R14.1500