About that blue wave

RMB Markets Daily: About that blue wave

Global: It’s down to the wire in the US

SA: Waiting on the president

Rand: Continued outperformance as risk assets ignore election uncertainty

Local rates: Rand shrugs off US election uncertainty

What to watch today

• JN Jibun Bank Japan PMI Composite
• GE Markit Germany Construction PMI
• UK Markit/CIPS UK Construction PMI
• EC Retail Sales (y/y)
• SA Electricity Production (y/y)
• SA Electricity Consumption (y/y)
• UK Bank of England Bank Rate
• US Initial Jobless Claims
• US Continuing Claims
• US Unit Labor Costs
• US FOMC Rate Decision

Covid-19 update

Source: WHO, NICD

Economics and markets

• Odds in favour of the blues in the White House, but the Reds to hold the Senate
• Legal challenges to sour election outcomes
• Risk assets impervious to US election noise
• Risk rally devoid of virus concerns, though momentum will probably slow
• SA awaiting presidential guidance amid concerns of a second wave
• Fed to take apolitical stance but perhaps speak of additional QE as is expected of the BoE
• USD/ZAR opens at 15.87; EUR/ZAR at 18.61; GBP/ZAR at 20.61 and CNY/ZAR at 2.38.

The blues have taken Michigan and Wisconsin, with a slim lead in Nevada placing Joe Biden within paddling distance of the White House. The blue wave will probably break before the steps of Capitol Hill, with the Senate leaning towards the GOP amid a strong push by Republican incumbents. There’s an outside chance that the Democrats could secure a slim majority if the race in Georgia takes an about turn, but that seems improbable. 

Without mimicking @realDonaldTrump’s spewing of misinformation by calling results too soon, we’d venture that the Democrats’ ambitions in the Upper House will be pared even if Biden takes the presidential vote. Legal wrangling will mask any celebrations as the Republicans launch a series of challenges across several states against absentee ballots and mail-in votes received after the 19:00 deadline on the night of the election. This is hardly a new or unexpected occurrence. US elections are notoriously disputed, much to markets’ dismay. 

That said, traditional barometers of risk have settled into a sea of green after being swathed in red yesterday. Equities have more than compensated for the volatility that ensued after betting odds shifted in favour of Trump. The angst has since passed, with Wall Street setting a firm tone for Asian trade. Regional bourses are outstripping their DM counterparts, offering far greater opportunity to assume tech risk as the underlying stocks continue to offer value. 

The EM aggregate is better placed, but there are instances of unexplained outperformance across the currency spectrum. The rand market is baffled by recent spot movements. The local unit’s breach of USD/ZAR16.00 is bizarre considering SA’s fundamental weakness, though the trade surplus might be a point of differentiation. So too the currency’s carry trade appeal, though the extent of the rally is more than anticipated given the overarching global risk. Virus concerns will outlive the furore over US elections, creating intermittent bouts of risk aversion to which markets are well accustomed. Whether that drives the rand weaker is questionable, given its recent resilience to EUR/USD’s dip in the wake of the European lockdowns. Although risk assets have rallied strongly, the momentum will probably fade as the US elections play out, which should allow the rand to consolidate at current levels against the major crosses. 

Any restrictions announced by President Ramaphosa could unsettle rand investors but are unlikely to dislodge it from its 50c trading range. We await an official presidential announcement amid concerns of the formation of a second wave. The balance of SA’s active cases teeters on 50,800 as 90% of patients diagnosed have recovered. Yet concerns over the socioeconomic impact of another prolific rise in daily case rates has warranted a response from the presidency. 

After the spate of SOE financial results, there is nothing of significance on the local data calendar, with much of our attention still focused on the US, not least because of the election fanfare but also the Fed’s pronouncement tonight. J Powell will probably strike a diplomatic tone, steering away from any politically motivated commentary and, while rates are a moot point, talk of enlarging the Bank’s balance sheet in the absence of meaningful fiscal support could filter in. Likewise, the BoE is expected to announce additional QE as the UK struggles to contend with Brexit paralysis amidst the pandemic panic. The volatility in sterling assets reflects the current despair, with markets beginning to price negative rates and a debasing of the currency by the middle of 2021. 

Nema Ramkhelawan-Bhana

Local rates

The uncertainty of the US election and substantial turns in who will walk away as winner caused some interesting swings on Wednesday morning in the local currency, but once things started to return to normal, the rand stabilised below R16/US$ and has since held onto these gains. As we have seen from recent trade numbers, the rand is still benefiting from a surplus as imports remain muted and exports continue with strong commodity prices. On the back of the stronger rand, local bonds tried to stage a rally yesterday but were somewhat hampered by the green-shoe options which are now a couple of points in the money. The market does feel like it wants to rally though, with the US election basically out of the way and the Fed not expected to do anything major tonight. There are, however, some risks coming up with the potential for further rating downgrades from both S&P as well as Moody’s. 

This morning, we have the rand holding at R15.93/US$, with bonds some 5-7 points down from last night’s close. 

Besides the FOMC tonight, we have jobless claims this afternoon at 14:30, but nothing out locally of interest today. 

Deon Kohlmeyer