DAILY MARKET UPDATE - 02 OCTOBER 2019
Merchant West Capital Markets
USD/ZAR 15.33750 | EUR/ZAR 16.7950 | GBP/ZAR 18.8485
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Offshore events stole the show yesterday, with weakness in the US manufacturing sector on full display. A print of 47.8 in the ISM manufacturing index marked the lowest point since the 2009 global financial crisis. The pace of slowdown will be concerning to investors, as just a year ago the ISM registered a very buoyed 59.5. This came on the heels of some fragile European PMI data as well as a contraction in the Caixin Chinese PMI, which feeds into the narrative that weak global growth headwinds are raising US recession risk. US 10y breakeven rates – the bond market’s inflation expectation indicator – are testing their lowest levels since China last faced significant industrial slowdown risk in 2016.
The data seems to have turned the screws on higher risk assets generally, with European, US and Asian stocks closing lower. Industrially-sensitive metal prices also fell in response, bearish for the rand from a trade sensitivity perspective. Similarly, high yield emerging market currencies were under pressure, even despite rate cuts at the Australian central bank and a US dollar that weakened against developed market counterparts. This price action would suggest that markets are shifting increasingly into defensive positioning at present, which would be characterised by more safe-haven assets starting to shine. Gold and the Japanese Yen will be closely watched in this context as fundamental hedges against a US stock market that could find itself under deep pressure if earnings results start to show significant financial stress in key sectors.
In terms of the spot market, it is possible that we see a break above 15.50 before the week is over, but it is worth pointing out that at these levels the USD-ZAR is overvalued. Furthermore, the USD itself is retreating from its highs to ease the pressure and yesterday's US data will have boosted speculation of more rate cuts in the US. Therefore, although possible, it seems unlikely that a sustained break above occurs before the MTBPS has taken place, while the ANC has yet to indicate its position on Treasury’s reform proposal.
Range for the day: 15.25 - 15.50