Global Markets Daily: Expecto Patronum!

Global Markets Daily: Expecto Patronum!

Global: Markets weigh rhetoric versus reality

SA: SARB governor clarifies its stance on so-called “magic money”

Rand: Dragged weaker by EM complex

Local rates: Market rallies despite foreign selling

What to watch today

• JN National CPI (y/y)
• GE PPI (y/y)
• SA Bloomberg June South Africa Economic Survey
• EC ECB Current Account SA
• US Current Account Balance

Covid-19 update

Source: WHO, NICD

Economics and markets

• However spellbinding the concept of “magic money” or the monetisation of debt, it is not constitutionally mandated, says SARB governor.
• In a public lecture, Governor Kganyago once again took pains to underline the speedy and flexible approach taken by the SARB to support the domestic economy.
• He emphasised that the country was already in “a lot of trouble” prior to the crisis.
• The governor’s oration had no bearing on the short end of the FRA curve.
• As short-dated implied volatility on USD/ZAR rises, so too does the bias for weakness.
• USD/ZAR opens at 17.47; EUR/ZAR at 19.58; GBP/ZAR at 21.70 and CNY/ZAR at 2.43.

Harry Potter enthusiasts would smile gleefully at the title of today’s commentary. A powerful incantation used to drive away dark creatures. Expecto Patronum! Expecto Patronum! ...Sadly, our current circumstances are immune to the potency of this well-liked spell. 

However spellbinding the concept of “magic money” or the monetisation of debt, it is not constitutionally mandated, says SARB governor Kganyago. “The SARB cannot take responsibility for solving a fiscal sustainability problem, nor can it jeopardise the value of the currency by agreeing to inflationary money printing.”  

In a public lecture, Governor Kganyago once again took pains to underline the speedy and flexible approach taken by the SARB to support the domestic economy and ensure continued market functioning in the wake of the covid-19 crisis. He emphasised that the country was already in “a lot of trouble” prior to the crisis and that these troubles would not be fixed through some kind of quantitative easing measures, but that society needs to choose to harness the "ingredients needed to get permanently strong economic growth." 

The governor’s oration had no bearing on the short end of the FRA curve, with 25bp of cuts being priced over the next two meetings, more modest than the 50bp of cuts that we anticipate by September. The swap curve is receiving considerable interest from offshore participants as concerns over SA’s debt sustainability deflect interest from the local bond market. That is evident in our local rates commentary, which cites the selling activity that has taken place, but the desk notes that it does not necessarily correlate to the queries being received from offshore participants or yesterday’s price action. 

At USD/ZAR17.40, the rand is of little help to the local bond market. The extent of the overnight move across the EM spectrum was largely unforeseen as the broader market is flat to slightly positive. Rhetoric versus reality, as Bloomberg puts it, is driving global sentiment, perhaps to madness, influencing spot rand movements. The manifestation of a second wave of infections, threats of a severing of US ties with China and warnings by Ray Dalio of a lost decade for US stocks are dueling with China increasing its purchases of US farm products and rampant stock prices. The resulting confusion is dulling risk appetite, though EM assets are starting to pull back after a rocky start to the day. 

As short-dated implied volatility on USD/ZAR rises, so too does the bias for weakness. A mass of option and futures expirations on Wall Street will probably conjure volatility as the quantum of trades stirring through the equities market warrants caution, dampening the modest data-induced risk-on tone. A read of US retail sales and manufacturing indices suggests that the economy is improving, albeit slowly, especially as jobless claims remain elevated. A point that Fed governors continue to stress ad nauseum, quieting notions of a sharp V-shaped recovery to pre-covid levels. 

It seems that if markets are void of magic, we are left to create our own. Wishing you an enchanted weekend. 

Nema Ramkhelawan-Bhana

Local rates

Despite offshore investors selling nearly R2bn of bonds, the R186 had a much better day yesterday with a late rally pushing it 20 points stronger on the day to 7.69%, from its daily high of 7.89% early in the morning. From our own perspective, we find the numbers slightly odd as we only had offshore buyers or clients looking to buy the whole day. 

With the green-shoe option expiry moved to today, given the actual auction was only on Wednesday, it will be interesting to see if the market can rally through the R2030 and R2032 auction levels (9.295% and 10.185%) this morning given this is where we closed last night on both bonds, with the R2030 potentially proving especially tricky given the increased R3.1bn size of the options. The R186s opens up today more or less unchanged at 7.70/66 with the rand weaker at R17.43/$. 

On the ILB front we have the usual weekly National Treasury auction closing at 11:00 this morning with the I2025/38/50 strip on offer. Despite the R1.4bn size, we expect reasonable demand for especially the longer-end 38s and 50s as we have seen definite demand for the longer-end ILBs from local investors recently. 

No major data out here or in the US today. 

Deon Kohlmeyer