DAILY MARKET UPDATE - 06 AUGUST 2019

capital markets

Merchant West Capital Markets

USD/ZAR 14.7861 | EUR/ZAR 16.5649 | GBP/ZAR 18.0127

Please feel free to contact us on the details below:

JHB: (011) 305-9500 | PTA (012) 742-8600 | CPT (021) 552-7007 

email: treasury@merchantwest.co.za

Market Data:

05 Aug - SA: Standard Bank South Africa PMI | EC: Final Services PMI | DE: German Final Services PMI | Markit Germany Construction PMI

06 Aug -  DE: Markit Germany Construction PMI | US: JOLTS Job Openings | Fed's bullard speaks on us economy

07 Aug-  SA: Gross Reserves | Net Reserves | SACCI Business Confidence

08 Aug - SA: Gold Production YoY | Mining Production YoY | Manufacturing Production YoY

09 Aug - CH: CPI YoY | UK GDP YoY | UK: Manufacturing Production YoY

Market Commentary:

After a manic start to the week yesterday which compounded the Rand’s losses to close to 5% over the previous five day trading period which was the most in the EM basket – ZAR finds some relief this morning with the market taking stock of the next potential steps when it comes to the much drawn-out trade tensions saga as the latest leg sees the U.S. calling the Chinese a currency manipulator. We have traded a high of 14.99 this morning but have come back around 1%, all the way to 14.82 currently with the drop somewhat easing. We are likely in for another choppy session with thin liquidity. Onshore we have short trading week as the locals will be celebrating Women’s Day on Friday which is also likely to take a strain on liquidity towards the end of the week. Expect to see some resistance at the 15.00 handle with a break above opening us up towards 15.15 with 14.70/75 on the downside (BNP Paribas).                          

The combination of a hawkish cut by the Fed and the exacerbation of trade tensions between the US and China came as a surprise to us and proved devastating for EMFX (not as much for local currency rates). Among our FX portfolio, we are particularly concerned about the dynamics of BRL (only because of the size of our allocation) and ZAR (due to positioning). We are also long TRY, CE3 currencies, and short KRW against USD. In credit, we are long protection in Colombia and short protection in Russia (in both cases via 5y CDS). Our strong conviction is to receive rates across the board (especially in the long end of the curves). We do not work with a scenario of a regime switch but a readjustment of risk. Our global risk premium and portfolio flows models suggest that with a few exceptions, closing or diminishing our exposure now would be suboptimal (BNP Paribas).

The Standard Bank Financial Conditions Index retreated again, to -0.30 in June, from -0.16 in May. Still, financial conditions improved to -0.17 in 2Q19, from -0.38 in 1Q19. At -0.27 year-to date, conditions are now better than -0.54 last year as well as significantly sounder than the -2.1 average for 2009 during which real economic activity, as measured by GDP, contracted 1.5% y/y. After the recent 25 bps interest cut by the SARB and with inflation still benign, we’d expect financial conditions in 2H19 to ease, and more so in 2020. Sustained reasonable growth in household credit and a rand recovery, per our forecast of R14.00/$ by end-2019/20, should also support financial conditions. Financial conditions should further benefit from the mooted policy interventions to boost growth, create jobs and improve the fiscal prognosis, all of which should support the JSE All-Share Index. That would encourage wealth, boost consumer purchasing power, and prop up real fixed investment. However, government policy interventions remain, mostly, outstanding and also most urgently needed. The industry-wide PMI for July slipped to a disappointing 48.4 index points, from 49.7 (consensus was for 49.6), showing widespread economic weakness. Downside risks to growth and employment still dominate. The BER manufacturing PMI for July though managed to breach 50, coming in at 52.1 index points. The industry-wide PMI covers a much wider sample, ranging from manufacturing, mining, services, construction and retail sectors, while the BER manufacturing PMI comprises just manufacturing (Standard Bank).

US-China trade tensions remain heated after Trump recently announced 10% tariffs on $300bn of additional Chinese goods effective at the start of next month; this does not include the $250bn worth of goods already subject to 25% tariffs. China in retaliation has demanded state-owned companies suspend imports of US agricultural products. After China allowing the CNY to fall to an 11-year low, the US administration has now labelled China “currency manipulator”, adding that the US would engage with the IMF to eliminate unfair competition from China. This ongoing trade war has been impinging on both global growth and emerging market assets. SA rates: After a 25bps cut last month, we expect the SARB to remain on hold. Real GDP: 0.6% for 2019 and 1.6% in 2020. Inflation: Average of 4.4% in 2019 and 4.7% in 2020. SA ratings: We do not expect rating changes this year, though the risk has now increased (Standard Bank).

Range for the day: 14.70 -15.00