Tech-tock

GM Daily: Tech-tock

Global: Clock runs down on tech advancement of 2020

SA: Massive data week ahead

Rand: Range trading though risks are biased to the upside

Local rates: Offshore better sellers of local bonds

What to watch this week

Monday

• SA Gross Reserves
• SA Net Reserves
• SA BER Consumer Confidence
• EC Sentix Investor Confidence
• CH Trade Balance

Tuesday

• JN GDP
• GE Trade Balance
• GE Current Account Balance
• EC GDP
• SA GDP
• US NFIB Small Business Optimism
• US Consumer Credit

Wednesday

• JN Money Stock M3 (y/y)
• CH PPI (y/y)
• CH CPI (y/y)
• SA BER Business Confidence
• US MBA Mortgage Applications
• US JOLTS Job Openings

Thursday

• UK RICS House Price Balance
• SA Current Account Balance
• SA Mining Production
• SA Manufacturing Production
• EC ECB Main Refinancing Rate
• US PPI Final Demand (y/y)
• US Initial Jobless Claims
• US Continuing Claims
• CH Money Supply M2 (y/y)

Friday

• JN PPI
• UK Monthly GDP
• GE CP
• US CPI
• US Monthly Budget Statement 

Covid-19 update

Source: WHO, NICD

Economics and markets

• The clock is ticking on the tech advancement of 2020.
• The tech sell-off will be a catalyst for deleveraging across asset classes made worse by significant US dollar shorts positioning.
• Lest we forget the slew of local data this week which could easily unsettle investors.
• Short-dated implied volatility is inching higher, but there’s little to suggest that the market is fully pricing the extent of local risk.
• The second week of September will be an exceptionally important one in terms of economic data releases.
• USD/ZAR opens at 16.61; EUR/ZAR at 19.65; GBP/ZAR at 22.07 and CNY/ZAR at 2.42.

Tick-tock or is it tech-tock. The clock is ticking on the tech advancement of 2020. Global bourses are in flux, with the Nasdaq futures performing woefully in early Asian trade amid uncertainty hanging over tech stocks. This after a report of huge option transactions by Softbank and Tesla shares not being included in the S&P 500. The tech sell-off will be a catalyst for deleveraging across asset classes made worse by significant US dollar shorts positioning. This should heighten volatility, which will probably become a daily occurrence in the run up to the US elections post Labor Day.

From a fundamental standpoint, improvements in commodity and industrial metal prices, helped along by positive growth in Chinese US dollar exports, continues to provide downward impetus to the rand. Led by global determinants, the rand continues to test the lower bounds of the USD/ZAR16.50 to 17.50 range, but is biased towards the upside of the range as global risk sentiment sours. Lest we forget the slew of local data this week which could easily unsettle investors, switching the direction of the currency pair northwards this week, especially as long positioning on the euro is pared back amid renewed risk aversion. Short-dated implied volatility is inching higher, but there’s little to suggest that the market is fully pricing the extent of local risk. The impending Fitch review and the growing possibility of a ratings downgrade presents significant depreciatory risk. As does the MTBPS, which will be presented next month. 

The SARB remains mindful of excessive rand volatility but is not inclined to intervene directly. Per the SARB data released this morning, the changes in gross reserves and international liquidity position are administrative. FX swaps were conducted to sterilise the foreign currency proceeds received from the IMF in July, FX payments were made on behalf of the government, while valuation adjustments were made due to US dollar weakness. 

According to our FI strategist, Varushka, to fulfil the financing requirement set out in the supplementary budget (which includes the funds committed by the World Bank), the non-competitive take up (post the nominal auction) would need to be roughly 9.6%. The current auction take-up since the increase in weekly auction issuance remains strong, though the local market is reaching saturation point. Perhaps offshore interest will resume post the August lull. Long-dated local currency yields remain attractive relative to EM peers, but local risks, not least the fiscal woes and persistent electricity shortages, would need to subside before there is sustained interest. 

Our economists, Mpho and Siobhan, believe the second week of September to be an exceptionally important one in terms of economic data releases. An extract from their weekly reveals that “The headline act will be the release of the GDP figure for the second quarter of the year. This was the beginning of a rise in uncertainty and coincided with the strictest of South Africa’s lockdown levels. Thus, it should be no surprise that the expectation is for a substantial contraction. We currently expect the economy to have contracted by 45.4% q/q SAAR in the second quarter as the three-quarter on three-quarter contraction in mining and manufacturing was over 70%, vehicle sales and retail sales were down over 60%. There are a couple of sectors for which we don’t have high frequency data for, which could push the economy even worse or perhaps soften the blow. 

Hot on the heels of the GDP release will be the balance on the current account. This is expected to return to a slight deficit after the first quarter’s surplus as the trade balance fell in the second quarter. It will be an interesting, yet informative week given the high levels of uncertainty around these releases and the unprecedented shock faced by the economy this year.” 

I couldn’t have said it better myself! 

Nema Ramkhelawan-Bhana

Local rates

With the rand leading the emerging market rally against the greenback, the local currency finds itself in very familiar territory, hovering close to the 16.50 handle at the start of the new week. The front-end vol are slightly elevated this morning after coming off during Friday's afternoon trading session. The 1-week and 1-month implied volatilities are middling at 15.75 and 16.125 respectively this morning, while 3-month 25-delta risk-reversals and butterflies are being marked at 2.85 and 0.6250, respectively. 

Given, the mild rally in the domestic currency, we start seeing some take-profit cares below the 16.30 level from both real money accounts. With the rand maintaining its weakness bias, the next couple of trading sessions will prove crucial for the currency. Emerging market bonds have seen a significant increase in daily flows over the past few weeks, while year-to-date flow across EM bonds points to a net outflow, August was a very strong month for the region, in particular the hard currency bonds. 

Domestically, offshore remain better net sellers of local bonds on a month-to-date perspective. On Friday, we had our weekly inflation-linked auction. While it was not as strong as previous auctions, the growing demand for front-end linker bonds remained evident. The I2025s cleared auction at 2.75 (market 2.80) with a bid-to-cover ratio of 2.51, the I2038s cleared auction at 4.53 (market 4.50) with a bid-to-cover ratio of 1.23, while the I2046s cleared auction at 4.535 (market 4.57) with a bid-to-cover ratio of 1.82. Tomorrow we have the National Treasury coming to market with R186s, R2030s and R2035s which should make it a very interesting day. Good luck for the week ahead. 

Tebogo Mekgwe