Burnout

GM Daily: Burnout

Global: Lacklustre trading ahead of the Fed

SA: NT contemplates debt ceiling

Rand: Holding steady at USD/ZAR16.50

Local rates: R2032s clear strong

What to watch today

• SA Money Supply M3 (y/y)
• SA Private Sector Credit (y/y)
• SA CPI
• UK Consumer Credit (y/y)
• UK M4 Money Supply (y/y)
• US MBA Mortgage Applications
• US Advance Goods Trade Balance
• US Retail Inventories (m/m)
• US FOMC Rate Decision

Covid-19 update

Source: WHO, NICD

Economics and markets

• Markets are mirroring our tiredness, seesawing between data-led gains and anxiety over second waves of the virus.
• There isn’t a strong narrative guiding markets this week despite a Fed gathering, ongoing stimulus talks in the US and a wall of economic data and corporate earnings.
• The extent of policy intervention provides a firm backstop for financial markets.
• EUR/USD is trading steadily above 1.17, which is a boon to EM risk currencies.
• Local fundamentals are less than supportive to the rand, but the IMF’s loan disbursement is focusing the fiscal debate.
• USD/ZAR opens at 16.52; EUR/ZAR at 19.36; GBP/ZAR at 21.37 and CNY/ZAR at 2.36. 

Exhaustion has set in. Whether the outcome of economic stresses, burnout or covid-fatigue, we’re all feeling the effects of more than 120 days in lockdown. Markets are mirroring our tiredness, seesawing between data-led gains and anxiety over second waves of the virus. 

There isn’t a strong narrative guiding markets this week, despite a Fed gathering, ongoing stimulus talks in the US and a wall of economic data and corporate earnings. The global equities rally that has characterised market behaviour over the last few months appears more differentiated as fundamental underpinnings are being seen alongside technical valuations. You’d challenge my assertion based on the performance of the CSI 300, which continues to outperform on low volumes. Then again, the S&P benchmark closed 0.7% lower amid weaker-than-anticipated results from conglomerates like McDonalds Corp and 3M Co, reaffirming my point. Month-end rebalancing makes it all the more volatile ahead of today’s Fed meeting. 

Whether the US is on a path to a sustainable recovery is a matter of interpretation. Data is leaning towards a cooling of activity amid a resurgence in cases across the sun belt, necessitating prolonged policy support. The Fed is happy to oblige, having extended most of its emergency lending programmes by three months, through the remainder of 2020. The extent of policy intervention provides a firm backstop for financial markets. Further interest rate adjustments are unlikely, though the Fed is expected to express a dovish tone and possibly hint at the formalisation of its forward guidance, linking its rate path to specific economic conditions. In the absence of any progress on a US stimulus package, investors will look to the Fed to provide steer to a flaccid dollar. 

EUR/USD is trading steadily above 1.17, which is a boon to EM risk currencies. JP Morgan’s aggregate measure of EM currency performance is frolicking in the green as its constituents benefit from the US dollar’s misfortunes. The rand is holding firm around the USD/ZAR16.50 mark, but lacking the impetus ahead of the Fed to break meaningfully lower. Local fundamentals are less than supportive, but the IMF’s loan disbursement is focusing the fiscal debate as the government contemplates the introduction of a debt ceiling to reinforce its commitment to fiscal consolidation. In isolation, these assurances are irrelevant, but taken together and woven into a pointed policy document, the outcome could be reassuring to debt holders. 

With a second CPI print on the cards today as StatsSA catches up on its data releases, the June inflation figure will be particularly interesting to watch as we know that fuel prices will have remained in deflationary territory. However, what is unknown is what actual rental and owners’ equivalent rental will print at. We expect that inflation will moderate slightly to 2.0% y/y, taking 2Q20’s average to 2.3% – still lower than the SARB’s downwardly-revised 2.5% for the quarter. Whether this has a bearing on the Bank’s profile remains to be seen. 

Nema Ramkhelawan-Bhana

Local rates

With the 5-yr swap returning to pre-MPC levels, local real money remain better payers in the front end of the curve. We saw some interest in the 10-yr tenor towards close of trading yesterday, the FRA market remains quiet for now while we saw some R186s risk reversals being priced in the market.

The nominal bond auction was relatively well-attended, with auction stock clearing marginally through market levels. The R186s cleared auction at 7.4250 (market 7.44) at a bid-to-cover ratio of 2.25, the R2030s cleared auction at 9.12 (market 9.125), while the R2032s cleared at 10.00 (market 10.025) at a bid-to-cover ratio of 2.32. Post auction, we saw both offshore and local names looking for bids in the back end of the nominal curve, with CPI printing today, the market looks forward to next week’s auction announcement later.

The currency is holding steady around the 16.50 handle with local vol profit-takers waiting in the wings for a break towards the key support of 16.35. 

Tebogo Mekgwe