DAILY MARKET UPDATE - 04 JULY 2019 | Merchant West

DAILY MARKET UPDATE - 04 JULY 2019

capital markets

Merchant West Capital Markets

USD/ZAR 13.9589 | EUR/ZAR 15.7579 | GBP/ZAR 17.5670

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email: treasury@merchantwest.co.za

Market Data:

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:

The Rand clawed closer to the 14.00/$ level once again yesterday in late trading as the local unit found some steady ground while other emerging market currencies suffered under global trade tensions. The Rand reached a low of R14.0403/$ yesterday before closing the day at R14.0552/$.

South Africa’s Deputy Finance Minister, Dr David Masondo, spoke again yesterday, but this time addressing concerns surrounding the struggling state-owned entity, Eskom. Masondo said that South Africa’s government would not consider using quantitative easing to help rescue Eskom as it was not likely to work. He said that “Countries that have used quantitative easing had zero percent interest rates and that is not the situation here.” (Absa Capital)

Quiet day expected today due to the US being out for Independence Day celebrations. Also very quiet on the data front with only Eurozone Retail Sales figures being released today.

Eskom - South Africa is weighing extra options to support Eskom, including swapping the financially troubled state power firm's debt for government bonds or ring-fencing it in a special account, a senior treasury official said.Discussions are at an early stage, and it is not yet clear which option will be chosen, he said. Eskom, which supplies more than 90% of the country's electricity, has this year been forced into rolling nationwide power cuts that have eroded growth in an already fragile economy.

President Cyril Ramaphosa has pledged 230 billion rand ($16 billion) of support over the next 10 years but, with the firm operating at a hefty loss, officials say other measures will be needed to make it financially sustainable. Ian Stuart, acting deputy director general for the National Treasury's budget office, said various scenarios including a debt transfer were being considered for resolving the "large and complex" issue, with implications for South Africa's credit rating a key criterion.

Moody's, the only major credit agency that still classes South Africa at investment grade, said last year that taking on Eskom debt might under certain circumstances be ratings-neutral for the sovereign. The agency declined to comment on Stuart's remarks.For Eskom, meanwhile, passing on all its debt obligations would probably return the firm to profit.

"We are looking at which option is best both in terms of fiscal costs and support for the reform process," Stuart told Reuters. Support could take the form of ongoing subsidies, or the firm's debt could be moved off its balance sheet to the government or into a special purpose vehicle (SPV). "A switch to South African government bonds will be looked at, but we have to confirm the legalities of each option and implications for ratings agencies," Stuart said.

International Forex - The dollar was on the back foot on Thursday, trading near a one-week low versus the yen as falling Treasury yields fuelled expectations the U.S. Federal Reserve will cut interest rates this month for the first time in a decade. Government bonds are in the middle of a global rally, which has pushed U.S. Treasury yields to the lowest in more than 2-1/2 years and sent European yields to record lows on increasing bets major central banks will cut interest rates to bolster the global economy.

Waning expectations for a quick resolution to the United States-China trade war also hurt sentiment about the dollar. The focus now shifts to U.S. non-farm payrolls data due on Friday, which economists expect to have risen by 160,000 in June, compared with 75,000 in May. Positive payroll data is unlikely to buoy the dollar as expectations for U.S. rate cuts are strong, given low inflation and the fallout from the tariffs the United States and China have imposed on each other's goods."When U.S. yields are this low, you can't expect people to pile in and buy the dollar," said Junichi Ishikawa, senior foreign exchange strategist at IG Securities in Tokyo. “Sentiment is tilted toward testing the dollar's downside. There are expectations for lower rates in Europe and Britain, so it may be easier for the dollar to move versus the yen."

The dollar was little changed at 107.75 yen on Thursday, after touching a one-week low of 107.54 yen on Wednesday. The greenback has fallen 3.5% versus the yen in the past three months amid growing signs the Fed will cut rates at its July 30-31 meeting.Global forex trading likely will be subdued on Thursday as U.S. financial markets are closed for a public holiday.U.S. President Donald Trump's administration said on Wednesday it is scheduling a call with Chinese negotiators next week that would mark the resumption of talks between the two countries. Expectations for a smooth resolution to a dispute have waned after Trump said any agreement would have to be tilted somewhat in favour of the United States.

The euro was little changed at $1.1287 on Thursday, near a two-week low of $1.1268. The common currency has weakened since IMF Managing Director Christine Lagarde, perceived as a policy dove, was nominated as the next European Central Bank president.

*Information sourced from Reuters.com

Range for the day: 13.90 - 14.20