Daily Commentary - 29 May 2018

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

USD / ZAR 12.6006 - EUR / ZAR 14.5767 - GBP / ZAR 16.6933 -

Economic Events:

29 May : US Conf. Board Consumer Confidence

30 May : SA Money Supply ; Budget - EC Consumer Confidence - US MBA Mortgage Applications ; GDP data

31 May : CH Manufacturing PMI - SA PPI Data ; Trade Balance - EC CPI Estimate - US Initial Jobless Claims

1 June : EC Eurozone Manufacturing PMI - SA Manufacturing PMI - US Change in Nonfarm Payrolls ;ISM Manufacturing

Market Commentary:

We started our week off yesterday with the USD/ZAR very range bound and saw little movement in this currency pair, with light activity and a healthy mix of both buyers and sellers. The Rand simply stayed within a 5c to 6c band in around the mid 12.40’s.  However this same steady balanced activity could certainly not be said for the EUR/USD, and to a lesser extent the GBP/USD .

The political crisis in Italy has really put markets on edge, with Italian bonds and stocks selling off sharply, renewing fears among investors in one of Europe's largest economies and the world’s 4th biggest bond market.  The Euro yesterday fell to the lowest level since November 2017 against the dollar, after Italy's president scuttled an attempt by a coalition of Italian anti-establishment parties to form a government & by early afternoon had already fallen to €/$ 1.1605.

The possibility of fresh elections sent the Italian 10-year government bond yield higher, 2.68% from 2.36% earlier yesterday, while the interest-rate spread over similar German bunds widened above 2.30 percentage points, the highest since late 2013, indicating a high level of market stress.

"We doubt that new elections are a panacea for Italy's future stability", said Ann-Katrin Petersen, investment strategist at Allianz Global Investors. She expects bonds of nations such Portugal and Spain to remain vulnerable over the uncertainty at the heart of the Eurozone, with both those countries' bonds also getting sold off quite aggressively yesterday, yet certainly nothing in comparison to Italy, with Spain’s political situation rather tenuous at present.

The Italian banks were especially hard hit. Banco BPM SpA was among the biggest losers on the Stoxx 600, having lost at least 6.3%. Plunging prices set off circuit breakers that halted trading briefly for banks BPM, BPER SpA, Unione di Banche Italiane SpA, FinecoBank Intesa Sanpaolo SpA, Banche Generali SpA, along with Italy's largest bank, UniCredit SpA. The suspensions were automatic and based on price fluctuations, the Italian Stock Exchange said.

Italy’s president, Sergio Mattarella has turned to International Monetary Fund veteran Carlo Cottarelli to form a government. Mr. Cottarelli said yesterday he's working hard on the process, but he is likely to face resistance from the populist bloc, which enjoys a majority in parliament. The situation could lead to fresh elections focused squarely on the issue of Italy's participation in the euro.  "It's difficult to see Mr. Cottarelli as the head of the transition government. Many parties won't give him a confidence vote," said Vincenzo Longo, a market analyst at IG Italia ad without a vote of confidence, Italy might head back to the polls as early as this summer.

Plus we must also remember that neither the U.K. or the U.S.A. were in the markets yesterday with both countries respecting Memorial Day & hence may well see even further negative activity today again the struggling Euro.

On the data front, things were of course rather quiet yesterday and today promises to be the same. Wednesday is when things get started with the S.A. Budget figures being the hot one to watch locally, and for now the “Ramaphoria” trend does still seem to be keeping off-shore investors sentiment as positive towards South Africa, which is also being supported with what is presently stabilising fundamentals.

We are seeing our day starting off with a flight to safety, under the Eurozone uncertainty.  The Yen and Dollar are the two currencies being picked up, and we have already see further weakening of the Euro and Sterling with the EM Currencies sadly now also being pulled along.  The ZAR has moved above 12.50 again and we may have an even tougher afternoon when the U.S. themselves finally return from their long weekend.

Our Range for the Day  :-    12.45   -   12.65