Securing the scaffolding

GM Daily: Securing the scaffolding

Global: Risk sentiment remains buoyant despite doubts over US stimulus

SA: Business surveys reflect devastating effects of lockdown on activity in 2Q20

Rand: Spurred by a stronger EUR/USD; support evident at USD/ZAR16.25

Local rates: Curve steepening

What to watch today

• JN Jibun Bank Japan PMI Mfg
• JN BOJ Outright Bond Purchase 1~3 Years
• US MBA Mortgage Applications
• SA Retail Sales
• US FHFA House Price Index (m/m)
• US Existing Home Sales

Covid-19 update

Source: WHO, NICD

Economics and markets

• EU leaders have provided a secure foundation upon which the most devasted economies can rebuild.
• The complementary fiscal support should lessen the need for additional ECB intervention, provided regional growth stays the course.
• Although the pace of new cases in the US is moderating, the devastating impact of covid-19 lingers across the sun belt.
• A resurgence in cases underscores the fragility of the nascent recovery, necessitating sustained fiscal support.
• Concerns mount that congress will fail to approve a rescue package before the August recess.
• While there is uncertainty over a congressional agreement, it hasn’t punctured risk sentiment.
• Having breached USD/ZAR16.50, immediate support is evident at 16.25, though consolidation is probable ahead of the MPC.
• USD/ZAR opens at 16.41; EUR/ZAR at 18.91; GBP/ZAR at 20.89 and CNY/ZAR at 2.36.

In reinforcing the scaffolding built by the ECB, EU leaders have provided a secure foundation upon which the most devasted economies can rebuild. Having suffered under the strain of covid-19, Italy and Spain will be at the forefront of the grant and loan programmes to fund restoration activities. Bondholders are pleased with the outcome as reflected in the tightening of Mediterranean yield spreads over comparable German debt, though arguably much of the narrowing occurred after the ECB extended its PEPP programme, reflecting the might of the central bank. 

The complementary fiscal support should lessen the need for additional ECB intervention, provided regional growth stays the course and isn’t impacted by subsequent waves of infection. A reality that Hong Kong is contemplating following a resurgence in active cases, though speculation of lockdown measures being re-imposed is being quashed. Although the pace of new cases in the US is moderating, the devastating impact of covid-19 lingers across the sun belt. Texas saw its second-highest daily fatality toll yesterday, while Mississippi recorded a 3.7% rise in cases. 

A resurgence in cases underscores the fragility of the nascent recovery, necessitating sustained fiscal support. As elements of the US$2trn Cares Act expire and its positive effects on income growth and spending wane, concerns mount that congress will fail to approve a rescue package before the August recess. The GOP and Democrats are at odds over the size of the stimulus. Unsurprisingly, as the presidential election draws near and each party expresses its political ideologies through negotiations. As fiscal conservatives, the Republicans are advocating for US$1trn, while the more laissez-faire Democrats are calling for roughly three times that amount. 

While uncertainty over a congressional agreement and bubbling tensions between the UK and Russia undermine recent market positivity, that hasn’t punctured risk sentiment. The evidence is clear. EUR/USD is as its highest level since January 2019, China’s CSI 300 index is heading for a fourth successive day of gains, silver has risen around 15% this week and gold is lengthening its rally. An almost perfect backdrop for risk assets, not least the rand, which closed yesterday’s session at multi-month lows against the weakening US dollar. Having breached USD/ZAR16.50, immediate support is evident at 16.25, though consolidation is probable ahead of the MPC. 

While local determinants are seemingly of less relevance to the rand market, the fragility of the economy is still being actively priced in the local bond market. The BER’s "other services" survey, of sectors that account for about one fifth of the economy, showed that confidence in 2Q20 plunged to the lowest level in the survey’s 15-year history. An "unmatched drop-off in activity", echoing the results of the SARB’s leading and coincident indicators which reflected a similar view of the economy. Improvements will be evident in reopened industries, though progress will be measured as demand remains depressed. Stimulus is still the order of the day! Cue the SARB. 

Nema Ramkhelawan-Bhana

Local rates

The R186s cleared 5bp through market with a bid-to-cover ratio of 4.50, the R2032 also cleared relatively strong at 10.31 (market 10.35) with a bid-to-cover ratio of 2.75, while the R2037 cleared auction at 11.40 (market 11.365) with a bid-to-cover ratio of 2.03.

The curve was a tad steeper going into auction and it was no surprise that the R186s were the favourite among auction stock, with decent bidding interest from both local and offshore investors. Last week’s flows were also an indication that the R2032s would perform better than R2037s in yesterday’s nominal auction; at stumps, all three bonds had closed relatively tighter to the clearing yields. With the R2048/R186s and R2044/R186s spreads middling at 415bp and 420b, respectively, we are certainly going into the MPC meeting with a much steeper bond curve as demand for the longer-dated bonds remains lukewarm.

Flows in the interest rate derivatives market remains light, although we saw some swap payers in the shorter-dated space followed by local real money paying longer than 20-yr swap yesterday. The FRA market remains skittish ahead of Thursday, with the 1x4 and 3x6 trading at 3.66 and 3.51, respectively, with the market suggesting a 25bp cut this week, we expect to see some much needed pick up in the interest rate vol space. With the rand leading the EM rally against the greenback, we saw some local real money accounts taking profit on some risk reversals yesterday in the late afternoon. Good luck out there. 

Tebogo Mekgwe