DAILY MARKET UPDATE - 05 JULY 2019 | Merchant West

DAILY MARKET UPDATE - 05 JULY 2019

markets commentary

Merchant West Capital Markets

USD/ZAR 14.0579 | EUR/ZAR 15.8431 | GBP/ZAR 17.6806

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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:

Most emerging market currencies have probably seen the best of a lukewarm year against the dollar as U.S. President Donald Trump is expected to back-pedal on his conciliatory tone from the recent G20 summit, a Reuters poll showed on Friday. Emerging market currencies have had a relatively resilient year despite a long list of risks, such as elections in South Africa and fractured relations between the United States with trading partners from China to Turkey. The poll, taken in the past week, suggested emerging market currencies will lose the gains held since the year began.

South Africa's rand is expected to lose almost 4% to 14.50 against the Greenback, Russia's rouble about 2.5% to 65.00/$, and India's rupee about 2% to 70.00/$.These currencies staged a mild recovery after the Group of 20 summit in Japan, where Trump offered some concessions in the trade spat with China. But analysts are not convinced that will last. The United States and China agreed on Saturday to restart trade talks after President Donald Trump offered concessions including no new tariffs and an easing of restrictions on tech company Huawei in order to reduce tensions with Beijing. China agreed to make unspecified new purchases of U.S. farm products and return to the negotiating table, Trump said. No deadline was set for progress on a deal, and the world's two largest economies remain at odds over significant parts of an agreement.

Financial markets, which have been rattled by the nearly year-long trade war, are likely to cheer the truce. Washington and Beijing have slapped tariffs on billions of dollars of each other's imports, stoking fears of a wider global trade war. Those tariffs remain in place while negotiations resume. “We’re right back on track," Trump told reporters after an 80-minute meeting with Chinese President Xi Jinping at a summit of leaders of the Group of 20 (G20) major economies in Osaka, Japan. “We’re holding back on tariffs and they're going to buy farm products," Trump said, without giving details about the purchases.

The U.S. president had threatened to slap new levies on roughly $300 billion of additional Chinese goods, including popular consumer products, if the meeting in Japan proved unsuccessful. Such a move would have extended existing tariffs to almost all Chinese imports into the United States. In a lengthy statement on the two-way talks, China's foreign ministry quoted Xi as telling Trump he hoped the United States could treat Chinese companies fairly. “China is sincere about continuing negotiations with the United States ... but negotiations should be equal and show mutual respect," the foreign ministry quoted Xi as saying.

Trump offered an olive branch to Xi on Huawei Technologies Co , the world's biggest telecom network gear maker. The Trump administration has said the Chinese firm is too close to China's government and poses a national security risk, and has lobbied U.S. allies to keep Huawei out of next-generation 5G telecommunications infrastructure. Trump’s Commerce Department has put Huawei on its "entity list," effectively banning the company from buying parts and components from U.S. companies without U.S. government approval.

"We think that the recovery will come to an end, as Trump inevitably relapses into protectionist talk and downside risks to Chinese and U.S. growth materialise," said Francesca Beausang, senior economist at Continuum Economics. "The (current) recovery for emerging market currencies is driven by a resurgence of risk-on sentiment given the more conciliatory tone struck by U.S. President Trump at the G20, especially vis-à-vis China," added Beausang. Representatives from the United States and China are organising a resumption of talks for next week to try to resolve the year-long trade war between the world's two largest economies, Trump administration officials said on Wednesday.

LIMITS TO GAINS

The Federal Reserve has signalled interest rate cuts could come soon, partly due to uncertainty caused by the trade war and several emerging markets' central banks have either embarked on easing or are on the road to do so. Still, interest rates in some of these economies will still be high enough to attract capital inflows. In South Africa on Thursday the rand broke through the psychological 14 level, its strongest in two-and-a-half months.

Annabel Bishop, chief economist at Investec, noted that while the rand is likely to continue to gain from perceptions - and occurrence - of global monetary easing, third quarter trading always tends to show risk-off sentiment. "In particular, fears of slowing global economic growth have impacted markets, and could limit emerging market currencies' gain in the third quarter," she said.

Domestic politics could also become a bigger risk factor as the second half of 2019 progresses, especially in Latin America. Brazil's controversial pension reform plan goes to crunch time this month, while Argentina moves towards October's general election in an increasingly bitter campaign over economic matters such as the future of its stand-by credit line with the International Monetary Fund. Last month, a similar survey suggested investors will be more cautious and selective in making risky bets against a strong dollar in coming months as fears over the United States' aggressive trade policy rattles markets.

*Information sourced from Reuters.com

Range for the day: 13.90 - 14.20