DAILY MARKET UPDATE - 08 AUGUST 2019 | Merchant West


capital markets

Merchant West Capital Markets

USD/ZAR 15.0880 | EUR/ZAR 16.9312 | GBP/ZAR 18.3549

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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 15.00 handle finally gave way yesterday pushing all the way to 15.17 (a new high for the year), ZAR closing around 1% weaker on the day which was the most in the EMFX space. There were also more Eskom developments for the market to digest yesterday with headlines surrounding government taking on Eskom debt (our view: The Treasury will probably have to take on a portion of Eskom’s ZAR441bn outstanding debt stock which is 8.8% of GDP and rising, via some form of a ‘special purpose vehicle’). There seems to be a feel of respite this morning with a hint of ‘correction’ for the day ahead – the last working day of the week for the locals. The U.S. Dollar is stable at current levels – we are likely to see a mixed trading day ahead with some consolidation likely. 15.17 will serve as the next resistance level with a close below 14.70 to question the upside (BNP Paribas).

Mining output is expected at 0.4% m/m for June, rebounding from -1.5% m/m in May; manufacturing output is expected at just 0.5% m/m, after a robust 3.0% m/m in May. We’d therefore expect some growth rebound for 2Q19 off the very low 1Q base. In 1Q19, mining and manufacturing constrained GDP growth; mining declined 10.8% q/q (seasonally adjusted and annualised), a third quarter of contraction, and manufacturing fell 8.8% q/q due to the widespread power cuts in 1Q by Eskom that had already begun in December 2018. SA’s primary and secondary sectors have been underperforming SA’s services sectors that have been managing to prop up both economic growth and employment. Employment in the services sectors was 274,000 higher in 2Q19 than 2Q18; however, employment in the primary and secondary sectors fell by 132,000 in that time. The persistently poor growth in SA’s primary and secondary sectors can be ascribed to unstable power supply; higher electricity, water, port and rail costs; policy uncertainty; and poor domestic demand. These sectors employ about 4.5m, including both semi-skilled and unskilled. Sustained weakness here therefore restricts both economic growth and jobs as well as the revenue base and fiscus which already are under strain. It could even eventually restrict the services sectors, should SA’s urgently needed political and policy reforms neither improve competitiveness nor attract investment (Standard Bank).

The SACCI business confidence index slipped to 92.0 pts in July, from 93.3 pts in June, due to “the divisions on policy, political and factional lines”, according to the Chamber. The industry-wide PMI too failed to recover, sliding to 48.4 pts in July, from 49.7 pts in June, as reforms remain wanting and domestic demand weak. The Reserve Bank of India MPC unanimously cut the policy rate by 35 bps, to 5.40% — citing slow economic growth on global trade tensions. This was a fourth cut; cumulatively a reduction of 110 bps. The bank also trimmed growth expectations to 6.9% for 2019/20, from 7.0%. Global central banks are easing monetary policy to support economic growth which is being hamstrung by trade and technological tensions. The SARB too cut the policy rate by 25 bps in July due to weak growth (Standard Bank).

Range for the day: 14.85 – 15.15