DAILY MARKET UPDATE - 12 AUGUST 2019 | Merchant West


daily markets commentary

Merchant West Capital Markets

USD/ZAR 15.3375 | EUR/ZAR 17.1385 | GBP/ZAR 18.4905

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Market Data:

12 Aug - US: US Monthly Budget Statement

13 Aug - JN: PPI (m/m) | US: CPI (y/y)

14 Aug-  UK: CPI (y/y) | House Price Index (y/y) | EC: Employment (y/y) | GDP (y/y) | SA:  Retail Sales (y/y) | US: Import Price Index (y/y) | Export Price Index (y/y)

15 Aug - US: Retail Sales Advance (m/m) | Industrial Production (m/m)

16 Aug - No meaningful information

Market Commentary:

Local front - South Africa's rand was slightly weaker early on Monday, giving up small gains that had enabled it to pull back from an 11-month low as political uncertainty and a bleak economic outlook continued to weigh. At 08h30, the rand was 0.2% weaker at 15.2925 per dollar compared to Friday's close of 15.2625. The rand plunged to 15.3100 on Wednesday, its lowest level since September 2018, with weak data, worries about the impact on the economy of heavily indebted state-owned energy firm Eskom and negative commentary from credit rating agencies piling pressure on the currency.

"The long-term objective is still the 2016 highs of 17.9000 but the more immediate target will be the 2018 highs of 15.6950, which could materialise this week," Standard Bank's chief trader Warrick Butler said in a note. "Volatility has of course picked up massively over the last three weeks and the rand is now officially the worst performing currency globally since this mess started in the middle of July." Broader concerns about emerging markets and trade tensions between the United States and China have added to the rand selloff. Confusion around a possible resolution lingered after U.S. President Donald Trump said on Friday he was not ready to make a deal with China and called a September round of trade talks into question.

International front - Goldman Sachs Group Inc said on Sunday that fears of the U.S.- China trade war leading to a recession are increasing and that Goldman no longer expects a trade deal between the world's two largest economies before the 2020 U.S. presidential election. "We expect tariffs targeting the remaining $300bn of US imports from China to go into effect," the bank said in a note sent to clients’. President Donald Trump announced on Aug. 1 that he would impose a 10% tariff on a final $300 billion worth of Chinese imports on Sept. 1, prompting China to halt purchases of U.S. agricultural products. The United States also declared China a currency manipulator.

The year-long trade dispute has revolved around issues such as tariffs, subsidies, technology, intellectual property and cyber security, among others. Goldman Sachs said it lowered its fourth-quarter U.S. growth forecast by 20 basis points to 1.8% on a larger than expected impact from the developments in the trade tensions. “Overall, we have increased our estimate of the growth impact of the trade war," the bank said in the note authored by three of its economists, Jan Hatzius, Alec Phillips and David Mericle. Rising input costs from the supply chain disruption could lead U.S. companies to reduce their domestic activity, the note said. Such "policy uncertainty" may also make companies lower their capex spending, the economists added.

International data front - U.S. producer prices increased moderately in July, lifted by a rebound in the cost of energy products, while underlying producer inflation retreated, which could allow the Federal Reserve to cut interest rates again next month. The benign inflation report from the Labor Department on Friday could boost expectations for a half-percentage-point cut at the Fed's Sept. 17-18 policy meeting. President Donald Trump on Friday urged the U.S. central bank to lower rates by a full percentage point, saying there was "no inflation in our country." Financial markets have fully priced in a 25-basis-point rate cut following a recent escalation in the bitter trade war between the United States and China, which led to an inversion of the U.S. Treasury yield curve and raised the risk of a recession. Fears about the trade war's impact on the economic expansion, the longest on record, prompted the Fed to lower its short-term rate last week for the first time since 2008.

"Weak producer prices are a reflection of a dramatic slowdown in manufacturing due to the global trade war," said Chris Rupkey, chief economist at MUFG in New York. "We expect a second rate cut by the Federal Reserve in September as the manufacturing sector and world economies continue to slow. “The producer price index for final demand rose 0.2% last month after nudging up 0.1% in June, the government said. In the 12 months through July the PPI increased 1.7% after advancing by the same margin in June.

*information provided from Reuters

Range for the day: 15.15 - 15.40