DAILY MARKET UPDATE - 01 July 2019 | Merchant West

DAILY MARKET UPDATE - 01 July 2019

markets commentary

Merchant West Capital Markets

USD/ZAR 14.1087 | EUR/ZAR 15.9872 | GBP/ZAR 17.8407

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Market Data:

01 July - SA: Absa Manufacturing PMI | US: Markit US Manufacturing PMI | ISM Manufacturing 

02 July - EC: PPI (y/y) | US: Fed's Williams Speaks on Global Economic and Policy

03 July - SA: Standard Bank South Africa PMI | SACCI Business Confidence | US: MBA Mortgage Applications | Trade Balance | Initial Jobless Claims | Markit US Services PMI

04 July - EC: ECB Chief Economist Lane Speaks in Frankfurt | Retail Sales (y/y) | SA: Electricity Production (y/y) | Electricity Consumption (y/y)

05 July - SA: Gross Reserves | Net Reserves | US - Change in Nonfarm Payrolls

Market Commentary:

South Africa's rand started the week stronger after the United States and China agreed to restart their troubled trade talks, lifting the mood across emerging markets. This morning, the rand traded at 14.0500 versus the dollar, around 0.2% firmer than its previous close. Government bonds were also stronger, as the yield on the benchmark 2026 bond fell 3.5 basis points to 8.06%. After meeting Chinese President Xi Jinping in Japan on the sidelines of Group of 20 summit, U.S. President Donald Trump said he would hold back on new tariffs and that China will buy more farm products. China is South Africa's top trading partner, and the rand is used by some investors as a proxy for emerging market risk, so the rand has tended to move on news on the U.S.-China trade war. Warrick Butler at Standard Bank said in a note to clients that markets were expecting the South African Reserve Bank (SARB) to cut its main lending rate by 25 basis points at its monetary policy meeting this month. “The likelihood of a SARB cut is high and the rhetoric could and should also be rather dovish," Butler said.

International Forex - The yuan gained and the safe-haven yen slid against the dollar on Monday as appetite for risk-sensitive currencies improved after the United States and China agreed to restart their troubled trade talks. The dollar was up 0.3% at 108.235 yen after going as high as 108.510.In offshore markets, the Chinese yuan initially gapped up to as much as 6.8166 per dollar, its highest level since May 9. It later pared gains to 6.8381 but was still up 0.5%.

After meeting Chinese President Xi Jinping in Japan on Saturday on the sidelines of Group of 20 summit, U.S. President Donald Trump said he would hold back on new tariffs and that China will buy more farm products. Trump also said the U.S. Commerce Department would study over the next few days whether to take Huawei off the list of firms banned from buying components and technology from U.S. companies without government approval. “Most of the discussions that took place between the United States and China at the G20 had already been anticipated, but the mention of Huawei was a bit of a surprise," said Yukio Ishizuki, senior currency strategist at Daiwa Securities. “There were more dollar short positions than expected, and these are being covered. But once these shorts are covered, the dollar's advance is likely to slow ahead of the non-farm jobs report." Economists polled by Reuters expect U.S. non-farm payrolls, which will be released on Friday, to have risen to 160,000 in June from 75,000 in May.Other key U.S. data due this week include Wednesday's Institute of Supply Management's (ISM) non-manufacturing activity index for June."The focus now shifts to U.S. fundamentals with the G20 over," said Koji Fukaya, director at FPG Securities."Some Fed officials curbed easing views recently and the data will help the market get a clearer picture of whether the Fed stands poised to cut rates this month."

At a June 18-19 policy meeting the Federal Reserve opened the door for possible interest rate cuts later this year. But comments last week from central bank officials, including Chair Jerome Powell, and the weekend agreement to resume Sino-U.S. trade talks have cooled expectations for aggressive rate cuts. Supported by the greenback's rise against the yen, the dollar index against a basket of six major currencies added 0.22% to 96.337.The euro fell 0.15% to 1.1351 against the Greenback. The Turkish lira was up 0.75% at 5.7409 per dollar after Turkish President Tayyip Erdogan said over the weekend that the United States did not plan to impose sanctions on Ankara for buying Russian defence systems. The U.S. Treasury 10-year yield was up about 3 basis points at 2.030%, putting some distance between a 2-1/2-year low of 1.974% plumbed on June 20.

Local data front - South Africa's April budget balance recorded a deficit of 63.53 billion rand ($4.35 billion) compared with a 43.71 billion rand shortfall in the corresponding period last year, Treasury data showed on Thursday.

Oil prices rose more than $1 a barrel on Monday after Saudi Arabia, Russia and Iraq backed an extension of supply cuts for another six to nine months ahead of an OPEC meeting in Vienna. Front-month Brent crude futures for September touched an intraday high of $66.44 a barrel and were up $1.57, or 2.4%, at $66.31 a barrel by 07h36.U.S. crude futures for August rose $1.36, or 2.3%, to $59.83 a barrel after earlier hitting a peak of $60.10, the highest in over five weeks.

The Organization of the Petroleum Exporting Countries (OPEC) and its allies look set to extend oil supply cuts until the end of 2019 after top producers on Sunday endorsed a policy aimed at propping up the price of crude. OPEC, Russia and other producers, an alliance known as OPEC+, meet on Monday and Tuesday to discuss supply cuts. The group has been reducing oil output since 2017 to prevent prices from sliding amid a weakening global economy and soaring U.S. output. Russian President Vladimir Putin said on Sunday he had agreed with Saudi Arabia to extend existing output cuts of 1.2 million barrels per day (bpd) by six to nine months.

*Information from Reuters.com

Range for the day: 14.00 - 14.25