Daily Commentary - 27 September 2018 | Merchant West

Daily Commentary - 27 September 2018

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

USD / ZAR 14.1630 - EUR / ZAR 16.5904 - GBP / ZAR 18.5803 -

Economic Events:

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 retreated early on Thursday as the dollar firmed after the latest U.S. Federal Reserve interest rate increase, while domestic investors awaited details of amendments to the mining charter. The rand was 0.35 percent weaker at 14.1835 per dollar by 09h02, having closed in New York at 14.1325. The dollar index against a basket of six major currencies edged up by 0.4 percent to 94.574. Minister of Mineral Resources Gwede Mantashe will brief journalists on amendments to the long-awaited mining charter on Thursday. The mining charter - introduced to provide redress for the exclusion of black people in the mining sector under apartheid - could yet be subject to legal challenges if mining companies are unhappy with its contents after publication The rand is expected to trade at 14.0500 to 14.3500 to the dollar on Thursday, NKC African Economics wrote in a note.

Much talked Stimulus Program -South Africa's shifting budget priorities will provide roughly half of the 50 billion rand ($3.5 billion) in stimulus spending it plans to make by the end of its fiscal year in March, Finance Minister Nhlanhla Nene told Reuters. The rest of the fund would come from internal development finance institutions (DFI), he said on Wednesday, outlining for the first time the basic structure of the fund. Nene said half of the funds would come from reprioritizing money away from underperforming government programs and the rest from internal DFIs.

"We don't want whatever is on the chopping block to be announced before the process has concluded," he said after an investor forum on the sidelines of the United Nations General Assembly meeting in New York. The government has said it would also launch a 400 billion rand "medium-term" infrastructure fund, that would be spent over three years, Nene noted. South Africa, under President Cyril Ramaphosa, who spoke at the forum, has launched a campaign to revitalize its economy which has fallen into a recession and has a 27 percent unemployment rate.  His stimulus plan has been met with skepticism as it does not include increased spending or borrowing to meet the goal of creating jobs and funding infrastructure programs. Nene said that while opposition lawmakers are skeptical, the reception from the business sector at home and in New York has been positive.

Land and Mining - Land and mining ownership reforms were among the main concerns voiced by investors in New York. Ramaphosa sought to reassure the audience that land reform "is not going to be a land grab". He said there have been over 600,000 submissions on how to proceed with reducing the concentration of land ownership. “This will lead to a process of evaluation of proposals," he said, emphasizing land ownership was critical to the life of South Africa and its people. On mining, Nene acknowledged there was "an acrimonious relationship" between the government and the mining houses". But he said a new mining charter is forthcoming, perhaps by the end of November, and a law is being rewritten to remove oil and gas extraction from mineral mining, a major sticking point.

The Moody’s leading analyst for South Africa Lucie Villa yesterday said that land reform could be a long-term positive for the country if it is carried out without undermining agricultural output. Villa made the comments to Bloomberg at the sidelines of a conference in London. She added that the land reform debate was ‘not ratings relevant at the moment’ but said that uncertainty around the lack of details could be negatively affecting investor sentiment over the short term. Moody’s scheduled rating review announcement is on 12 October.

FED Comments - For the past few months, U.S. companies have been sounding the alarm on the impact that the Trump administration’s trade wars will have on their businesses. Now those concerns are being echoed by Federal Reserve Chairman Jerome Powell, whom Trump appointed to the job in February. Powell spoke to reporters Wednesday after the Federal Reserve raised interest rates for the third time this year and indicated it would keep raising rates into 2019. Asked about the impact that Trump’s tariffs could have on the well-being of American companies, Powell shared concerns he’s been hearing from executives. “We’ve been hearing a rising chorus of concerns from businesses all over the country about disruption of supply chains, materials cost increases,” he said Wednesday. “If this, perhaps inadvertently, goes to a place where we have widespread tariffs that remain in place for a long time, a more protectionist world, that’s going to be bad for the U.S. economy.”

Trump didn’t respond to Powell’s comments on trade, but he has been openly critical of the Fed’s decisions to keep lifting interest rates higher under Powell’s tenure. In August, he reiterated he wasn’t “thrilled” about the moves, which are meant to stave off the risk of inflation in a strong economy. Following Wednesday’s rate increases, Trump spoke with reporters himself and said, “I am not happy about” the higher rates, adding that he’s “worried about the fact that they seem to like raising interest rates.”

Financial markets tend to prefer that central banks maintain an independence from politics. And while trade tariffs may not be the normal purview of the Fed, Powell was addressing a concern echoed by critics of tariffs: They can push prices higher, adding to the inflationary pressures that can result from companies paying higher wages to fill positions in a tight job market. Powell was also asked about Trump’s criticism of the Fed’s interest rate policy. He didn’t address Trump directly but stoically restated the central bank’s independence from the fray of politics. “We’ve been given a really important job to do,” he said. “We don’t consider political factors.”

Our range for the day : R14.0300 -R 14.3500