markets commentary

Merchant West Capital Markets

USD/ZAR 14.8997 | EUR/ZAR 16.7498 | GBP/ZAR 18.9173

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email: treasury@merchantwest.co.za

Market Data:

6 JUNE - SA - Current Account Balance | Electricity Production & Consumption | EU - Main refinancing rate | US - Trade Balance | Initial Jobless Claims

7 JUNE - SA - Gross Reserves & Net Reserves | US - Change in Nonfarm Payrolls | Unemployment rate

Market Commentary:

SA’s economy-wide PMI dropped to 49.3 pts in May, from 50.3 pts in April; consensus was for 50.1 pts. In May the BER manufacturing PMI too fell, to 49.5 pts, in the red for five consecutive months now. Clearly business conditions deteriorated further in May. The economy-wide PMI is a private sector based survey which covers sectors ranging from manufacturing, mining, services, construction, and retail; the BER manufacturing PMI comprises just manufacturing. SA’s worsening business conditions, alongside poor vehicle sales in May, which declined a significant negative 5.7% y/y, from a positive 1.2% y/y in April, demonstrates the underlying weakness in the SA economy. Manufacturing, mining, and retail sales data for April will follow shortly, which will shed more light on Q2. This in the wake of this week’s abysmal Q1 GDP outcome. Near-term economic growth prospects clearly remain fragile; our, below-consensus, 0.6% GDP growth forecast for 2019 therefore faces further downside risks. Global growth forecasts, per the World Bank, too are down, now at an average of 2.6% (from 2.9%), with the risks noted as being to the downside (Standard Bank).

ZAR just being pushed yesterday, with markets not sure on ZAR, lack of liquidity and the currency has been very choppy. Not sure if we can relate the ZAR movements to how South Africa is playing cricket at the moment in the world cup. We could easily break the 15 mark today, when current account numbers come out today at 11am, expecting some poor numbers post the poor GDP numbers. Expect ZAR to be on the back foot, with a push above 15 and could then test 15.10 (BNP Paribas). 

Q1 current account: we expect the current account deficit to have worsened to 3.5% of GDP (consensus: 3.3%), from 2.2% of GDP in Q4:18. Due to the poor Q1 GDP outcome, the risks are now skewed further to the downside. Although unlikely to be market-moving, electricity production, due out later today, will shed light on how the energy sector performed in Q2. SA’s shaky electricity supply remains a key risk to the economic outlook — as demonstrated by Q1 GDP which suffered extreme power cuts in that quarter. The ECB is expected to keep rates unchanged today, and adopt a more dovish tone. The need for further monetary policy accommodation in this region has increased due to the various intensifying trade battles and the World Bank’s global growth revisions. The bank has also cut euro zone growth by 0.4 ppts, to 1.2%, for 2019. The focus today will be on how the ECB plans to prop up the economy. The ECB has already said that it would provide this region’s banks with additional low-cost credit, starting in September (Standard Bank).

Range for the day: 14.80 -15.15