DAILY MARKET UPDATE - 07 AUGUST 2019

capital markets

Merchant West Capital Markets

USD/ZAR 14.8759 | EUR/ZAR 16.6842 | GBP/ZAR 18.1496

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:

The Rand struggled due to trade war escalations yesterday, with rates reaching as far as  R14.9985/$ before closing the day at R14.9289/$.Adding to the weakness were comments by ratings agency Moody’s yesterday afternoon that Eskom urgently needs a turnaround plan, citing an unsustainable capital structure. The Dollar strengthened yesterday after a few days of continued losses,  with the USD index closing the day at 97.630. Dollar strength was influenced by a rise in appetite for safe-haven markets after the US added to trade tensions by stating that China is a currency manipulator. There has been some stability on this front after China denied these accusations. The Euro saw higher volatility and a wider trading range yesterday amongst the tensions caused by the US and China, reaching highs and lows of $1.1250 and $1.1168 respectively, before ending the day somewhat flat at $1.1199. The Pound strengthened on Tuesday with the news that UK Prime Minister Boris Johnson’s opposition are planning to do all in their power to prevent a no-deal Brexit, including a potential vote of no-confidence when Parliament returns next month. The pound reached a high of $1.2210 before closing the day at $1.2171. (ABSA)

With the country having one of the steepest local curves and an underperforming currency, we believe most of the negative headlines are priced into South African assets. Eskom’s solvency issues are out of the way, at least for the next 12-18 months, and additional issuance pressure has started to materialise as well. Our EM FX model shows the ZAR undervalued, so we are long the currency (2 August). We also think the global move in rates should support the local curve, causing a flattening in 2s10s (18 June). One potential trigger for curve-flattening could be an upcoming external (hard-currency bond) issue. (BNP Paribas)

Unfortunately, SA's fiscal position has deteriorated to such an extent, that a full-blown economic crisis is necessary to force politicians, with no room to manoeuvre, to deal with the issues at hand. The level of politicisation of SA's decision-making process has meant that it has been impossible up until now. If there is one potential silver lining to SA's very dark economic cloud, it's that the threat of a fiscal cliff and loss of fiscal sovereignty, as happens in a fiscal crisis or bailout scenario, might depoliticise the decision making to some degree and bring an element of pragmatism back to the debate on how to stabilise SA. If sanity doesn't prevail and tough decisions are avoided, the risk of prescribed assets and the commandeering of the SARB's reserves should be anticipated, and will hold negative consequences for the ZAR and other SA assets (ETM Analytics)

Range for the day – 14.80 – 15.05