Gold shines bright like the Sturgeon Moon

GM Daily: Gold shines bright like the Sturgeon Moon

Global: Explosion in Beirut heightens concerns over geopolitical risks

SA: Consol Glass delays planned capital expenditure indefinitely

Rand: Week’s weakness to continue, but showing signs of slowing down

Local rates: Auction announcement to drive price action

What to watch today

• JN Jibun Bank Japan PMI Services
• CH Caixin China PMI Composite
• SA Standard Bank South Africa PMI
• GE Markit Germany Services PMI
• EC Markit Eurozone Services PMI
• UK Markit/CIPS UK Services PMI
• EC Retail Sales (y/y)
• US Trade Balance
• US Markit US Services PMI
• US ISM Non-Manufacturing Index

Covid-19 update

Source: WHO, NICD

Economics and markets

• Gold has broken through the US$2,000 per fine ounce level as geopolitical tensions remain elevated.
• Yesterday’s massive explosion in Beirut has not officially been designated an accident or attack yet, but has driven the price of Brent crude oil higher.
• The White House and Democratic Party have suggested that talks on a new stimulus package for the US should conclude by the end of the week.
• The rand continues to follow the week’s weakening trend, but there are some signs early in the day that this could be slowing down.
• South Africa’s RESI10 should see positive movements today in the wake of gold’s strength, which could keep the domestic equity market’s performance for the week in the green.
• USD/ZAR opens at 17.38; EUR/ZAR at 20.52; GBP/ZAR at 22.73 and CNY/ZAR at 2.50.

I learnt something new this week: the August full moon is known in the northern US as the Sturgeon Moon. Actually, every full moon apparently has a designation or association across the world. However, the US association for this week’s full moon seems the most appropriate, as sturgeon are famously the source of one of the world’s greatest and most expensive delicacies, caviar. And it has been in this week that gold broke through the US$2,000 per fine ounce level, rising to new, rather shiny highs. For investors who have been ploughing into gold during the course of this year in response to elevated risk, this will be quite the windfall. 

However, what this movement signals is the continuation of the risk-off trading environment. One of the factors pushing gold higher, as well as the price of Brent crude oil, was the massive explosion in Beirut yesterday. While this tragic event, which has resulted in numerous deaths and injuries, has not officially been designated an accident or attack by Lebanon, its timing is certainly curious, coinciding with a two-day grace period which saw numerous residents restocking in advance of the reimplementation of full lockdown. This has increased concern in markets of rising geopolitical tensions in the region, adding to the list of regions in which, or between which, geopolitical tensions are increasing. 

Markets are also closely watching the internal politics in the US as talks for a new stimulus package continue, with both the White House and Democratic Party suggesting that talks should conclude by the end of the week. Some slightly firmer good news out of the US is that Novavax is joining the frontrunners in the race to reach a covid-19 vaccination, having had some positive results in an early trial. 

This mixed news has definitely pushed markets all over the place, with US and Canadian bourses closing yesterday higher, but Mexico and Brazil falling. The Nikkei and ASX are trading down this morning, while the Hang-Seng and Shanghai exchange are up marginally, and the Korean and Malaysian bourses are flying high. EM currencies reflect similar mixed sentiment, with the yuan at its strongest levels against the US dollar since March, while Brazil and Mexico join SA in seeing their currencies weaker against the greenback. Thus far today, the local currency continues to follow the week’s weakening trend, but there are some signs early in the day that this could be slowing down. South Africa’s RESI10 should see positive movements today in the wake of gold’s strength, which could keep the domestic equity market’s performance for the week in the green.   

The real economy, however, continues to show weakness, with Consol announcing that it will indefinitely delay the planned construction of a R1.5bn glass manufacturing plant in Gauteng as the domestic alcohol sales ban has impacted production and thus demand for bottles – which constitutes the lion’s share of demand for glass packaging in SA. This is not good news for the domestic economy, which so desperately needs private sector capital investment to help boost potential and create jobs. We will see the publication of the July SA PMI, which will probably reflect the weak economy in which companies like Consol are making these decisions. 

May the brightness of the Sturgeon Moon also represent a light, of sorts, at the end of the very dark tunnel that has been 2020, although even if it is, we have quite a way still to travel.  

Siobhan Redford

Local rates

SAGBs continued to hold their ground against the currency yesterday, and price action was mostly driven by the auction results. The SAGB auction was well attended, with healthy bid-to-cover ratios across all three bonds. The R2048s fared surprisingly well, with yields clearing 2.5bp through market mids, while the R186s and R2032s tailed. This resulted in the curve coming under some pressure and flattening around 5bp. 

With most of the Northern Hemisphere on summer holidays, flows from offshore clients remain light. Given the divergence between the currency and bonds, it does seem like the offshore clients that are buying SAGBs are hedging their currency exposure, as it is cheap to do so currently, and SA yields that are FX hedged still provide a decent return. 

Data remains light till non-farm payrolls later this week. Price action in SAGBs should be driven by today’s auction announcement. Should the National Treasury issue a shorter slate next week, we will continue to see the curve flattening, but if a longer-dated bond is on offer, we could see a reversal of yesterday’s move. 

Michelle Wohlberg