Confusion reigns

Global Markets Daily: Confusion reigns

Global: Global markets shrug off WHO’s bearish outlook

SA: Data-heavy day ahead, but it will be 1Q20 GDP that attracts the most attention

Rand: To remain trading above 17.00 to the US dollar

Local rates: Risk-on sentiment boosts SAGBs

What to watch today

• UK Lloyds Business Barometer
• SA Leading Indicator
• CH Manufacturing PMI
• UK GDP
• UK Current Account Balance
• SA Private Sector Credit
• EC CPI Core
• SA GDP
• SA Trade Balance
• SA Monthly Budget Balance

Covid-19 update

Source: WHO, NICD

Economics and markets

• Markets are betting, once again, on a V-shaped recovery, as pending house sales in the US rose over 40% m/m in May, and with China’s official PMI figures remaining above the 50 neutral level since their February lows.
• Caution is warranted, though, with the US labour market still subdued and US economic activity still below pre-pandemic levels, while the virus has not yet been contained.
• We expect that SA will have contracted 3.8% q/q SAAR as economic activity in the first quarter was dampened by electricity supply constraints, pushing SA deeper into recession.
• Confusion reigns with respect to new regulations on the opening of the economy as we enter the third quarter of 2020, in particular on the question of whether hotels can accept bookings.

• USD/ZAR opens at 17.27; EUR/ZAR at 19.42; GBP/ZAR at 21.25 and CNY/ZAR at 2.44.

Confusion reigns. In South Africa, when contemplating what the new regulations mean for hotel groups with respect to accepting leisure bookings, and globally, with a pretty positive end to the month, despite warnings from the WHO and some concerns about US employment. 

It would seem that markets are betting, once again, on a V-shaped recovery, as pending house sales in the US rose over 40% m/m in May, more than double the Bloomberg analyst median expectation. This optimism has been given further impetus from improved official PMI figures out of China today. The manufacturing PMI, which fell to a low of 35.7 index points in February, has returned to above the 50 neutral level since March and remained there for the second quarter. The composite PMI has shown an even more dramatic recovery, rising from its February low of 28.9 index points to 54.2 in June. Further positive noise has come out of the US financial sector, with large investment banks recording strong earnings as fees from debt listings have replaced M&A earnings. However, it is worth heeding the warning from Fed Chair Jerome Powell that the “path forward for the [US] economy is extraordinarily uncertain…”[1]. This is premised on the fact that US economic activity remains below pre-pandemic levels, and the number of Americans employed, relative to the work-eligible population, is at its lowest level since 1948, and remains vulnerable to the spread of the virus – which the WHO has signalled is speeding up globally. A further sign that activity is not increasing significantly is that the oil price remains relatively subdued. 

It would seem that, contrary to the concern that by today some markets would erase their gains for June, Asian markets have followed US markets, trading positively. The Dow, S&P500 and Nasdaq all closed comfortably higher yesterday, followed by the Japanese and Australian bourses which are both trading around 2% up on the day. Still positive, but slightly more constrained, has been the activity of Chinese and Hong Kong bourses – partially in response to the growing geopolitical tensions arising from the passing of Hong Kong’s new security law by Chinese lawmakers. Interestingly, the actual law has not been publicly released in full, with even Carrie Lam, Hong Kong’s Chief Executive, admitting she hasn’t seen the full law. There are concerns for companies which have based their Asian operations in Hong Kong that the law will undermine the civil liberties, free markets and independent judiciary that has characterised China’s special administrative region. In response, the US has suspended Hong Kong’s special status. 

The JSE can look forward to a second consecutive day of positive trade based on positive sentiment, but will be sensitive to a number of data releases scheduled for today. These will also most likely drive the rand in one direction or another, although unlikely enough to see it strengthen past 17.00 to the US dollar. Front and centre being the release of 1Q20 GDP. We expect that SA will have contracted 3.8% q/q SAAR as economic activity in the first quarter was dampened by electricity supply constraints, pushing SA deeper into recession. We will only see the covid-19 and lockdown-related impact coming through in the 2Q20 GDP release. There will also be the release of SA’s trade data and monthly government budget data for May which will help us track how SA’s trade activity has fared through the second quarter and the extent of the impact of lockdown on government revenues and expenditure. As we enter the third quarter tomorrow, though, there remains significant confusion over some of the regulations published recently by

[1] https://www.federalreserve.gov/newsevents/testimony/powell20200630a.htm, accessed 30 June 202

government as the economy continues its gradual reopening, particularly for hotel groups. The regulations explicitly disallow people from booking home/room rentals for leisure purposes, but not for hotels, and it has been expected that hotels can take tourist bookings after the President’s latest speech. However, the Minister of Tourism has suggested that hotels remain restricted to taking bookings for business purposes only. 

While government and the tourism sector grapple with this issue, SA will see the opening of many other parts of the entertainment sector over the next few weeks, including restaurants, cinemas and casinos, under strict health protocols. So, while stuck in your city or province, there are now indoor options for entertainment should the temperature outside be a bit too chilly for you! But be careful and remember to stay safe. 

Siobhan Redford

Local rates

Despite an unexpected increase in bond issuance on Friday afternoon, SAGBs traded well ahead of today’s auction. Financial markets seem to be weighing up the increasingly upbeat economic data with the increase in covid-19 cases, and for now, the positive economic data seems to be leading the pack. The yield curve continued to flatten on Monday, with the R2048s closing the day 4bp tighter, while the R2030s only tightened by 1bp. 

We have the weekly SAGB auction today, with R186s, R2030s and R2035s on offer. Given the shorter duration of this auction and the fact that the non-comp options cover this morning’s GDP print, bidding interest for the auction should be relatively robust. We expect yields to clear at market mids, with the bulk of the interest seen in the R2030s despite the bond being relatively expensive. Risk-on sentiment should continue to provide support for SAGBs today, and we should see further flattening of the yield curve too. 

Michelle Wohlberg