Nosedive

GM Daily: Nosedive

Global: Equity markets in for a rough day

SA: Competition tribunal to review two PPE tenders for irregularities

Rand: Range trading 16.50-17.10

Local rates: Offshore buying helps bond yields lower

What to watch today

• GE Markit Construction PMI
• UK Markit/CIPS Construction PMI
• US Change in Nonfarm Payrolls
• SA SACCI Business Confidence

Covid-19 update

Source: WHO, NICD

Economics and markets

• The Dow fell 2.8%, the S&P 500 3.5% and the Nasdaq almost a full 5% as investors consolidated their positions.
• US initial jobless claims fell below 900,000 people this week.
• The ASX is down over 3%, and the Nikkei, Hang Seng, Shanghai Stock Exchange and Indian bourse are all down over 1% in this morning’s trading session.
• With US futures continuing to fall, we can expect the JSE to see a persistent downward trend today.
• The lack of a deal between the UK and EU is starting to show real potential consequences for business and people in the UK.
• Two cases have been referred to the competition tribunal for irregular PPE tenders.
• USD/ZAR opens at 16.73; EUR/ZAR at 19.83; GBP/ZAR at 22.22 and CNY/ZAR at 2.44.

What goes up must come down – in physics, it is gravity that sees this as an inevitability, but in markets, where gravity doesn’t rule, it is investor behaviour, results and economic expectations that both push the market higher and drive it down. Yesterday I spoke about the impressive performance in US bourses, and today, I must comment on their spectacular nosedives. The Dow fell 2.8%, the S&P 500 3.5% and the Nasdaq almost a full 5%. This was not because of poor economic data out in the US, as we saw higher-than-expected non-farm productivity in the second quarter, lower-than-expected unit labour costs and, importantly, a steeper fall than anticipated in initial jobless claims this week, to below 900,000 people. Adding to the good news was the improvement in the US Services PMI, while the Composite PMI fell very marginally. It would seem the understanding is that this turnabout has been largely driven by profit-taking (so investor behaviour), as traders and funds consolidate the gains they have made over the past few months. This makes sense, with news out that US executives sold the greatest value of stock holdings since 2015, also possibly in a profit-taking move and possibly fuelled by uncertainty on the path of covid-19. The disconnect between US and Asian markets that I mentioned yesterday has also righted itself as we see the ASX down over 3%, and the Nikkei, Hang Seng, Shanghai Stock Exchange and Indian bourse all down over 1%. This trend is expected to persist, with US futures continuing to fall today. So expect further losses on the local bourse as the JSE closed yesterday already 2.4% down, and it would seem the direction will be the same today. The rand, on the other hand, has been, by its standards, relatively calm in the latter part of the week, seemingly rangebound, and can be expected to trade between 16.50 and 17.10 to the US dollar. 

As new US fiscal stimulus remains absent, the UK faces its own issues over and above the current covid-19 fallout. In particular, with no trade deal agreed to with the EU, it would seem that some deadlines for business to adapt to new rules in the UK have passed. Food labelling is one such issue, and food producers and manufacturers have been calling for labelling guidance so that their food can be exported, but feel that, with no response as yet, the chances of them being ready to adhere to new standards from 1 January 2021 are at best slim. This sounds like something that may impact exports, but it also potentially has an impact on Northern Ireland (which will keep adhering to EU rules to prevent a hard border between Ireland and itself), which may not be able to “import” food from the rest of the UK and thus could face some food shortages (however, I do wonder if it just means they will be forced to import more, and possibly at a greater price, from the EU?). These negotiations are in sum not about posturing, but about the people on the ground who they represent, and it is important that clarity and guidance is given sooner rather than later, deal or no. 

On the ground here in South Africa, the news is generally more of the same – politics, corruption and investigations, and lockdown. The Zondo commission continues to hear evidence into its investigation on state capture, and following the AG’s report on covid-19 related corruption, it would seem there are two cases for contravention of the competition act (in conjunction with the state of disaster regulations) in PPE tenders that have been referred to the competition tribunal by the competition commission. This is but one avenue for enforcement of illegal or exploitative or corrupt practices, but it is a good sign that we are seeing progress. 

Thus, as spring actually makes landfall in South Africa, albeit about four days late, may you enjoy a sunny weekend. After the UK long weekend this week, the US looks forward to enjoying its last days of summer with a long weekend ahead, which suggests that after today’s frenzy in markets, we’ll see a calmer start to next week. 

Siobhan Redford

Local rates

The local bond market saw further gains yesterday on the back of good offshore inflows and positive local sentiment, with both sets of clients buying around R2bn net on the day. This enabled the market to rally on a Thursday, which is normally relatively difficult given the extra R6.6bn in stock available via the auction green-shoe options. The benchmark R186 managed to get to 7.21% yesterday, which is the lowest we have seen since mid-May and early June, but technical analysts will be excited about the double-bottom technical level here at 7.21%, which should prove a tough nut to crack. A break here should see the market target 7.04%, which were the lows of 2008 and 2015, with a break here targeting life-time low of around 6.60%, which is not an impossibility given how low short-term rates currently are, with another 25bp cut quite possible at the next MPC meeting in two weeks’ time. 

What could derail the downward move though is souring international risk sentiment, with US equity markets getting smashed yesterday (Dow -2.78%, S&P -3.51%, Nasdaq -4.96%) and in this regard, payroll data this afternoon at 2:30pm is potentially more important than usual. Expectations are for an increase of 1.35 million jobs last month, but any negative surprise might put US equity markets, and by association EM currencies, under pressure again. 

Before we get there though we have the usual weekly National Treasury ILB auction at 11:00am, with R2bn available across the I2025/38/46 strip of bonds, which is a good mix of maturities and is the same as last week, which saw very good demand across all three bonds. We expect similar interest this week, despite the recent rally in real yields, as the positive carry for September and October should be appealing enough to lure investors into the auction. 

Deon Kohlmeyer