The unstoppable force paradox

GM Daily: The unstoppable force paradox

Global: Global covid-19 case numbers compete with incoming economic data

SA: S&P questions plans to stabilise debt trajectory

Rand: Centred on global sentiment

Local rates: Poor ILB auction

What to watch this week

Monday

• GE Factory Orders (m/m)
• GE Markit Germany Construction PMI
• EC Sentix Investor Confidence
• UK Markit/CIPS UK Construction PMI
• US Markit US Services PMI
• US Markit US Composite PMI
• US ISM Non-Manufacturing Index

Tuesday

• JN Leading Index CI
• GE Industrial Production WDA (y/y)
• SA Gross Reserves
• SA Net Reserves
• SA BER Consumer Confidence
• US JOLTS Job Openings
• CH Foreign Reserves

Wednesday

• US MBA Mortgage Applications
• US Consumer Credit

Thursday

• CH PPI (y/y)
• CH CPI (y/y)
• GE Trade Balance
• GE Current Account Balance
• SA Manufacturing Prod
• US Initial Jobless Claims
• US Continuing Claims

Friday

• JN PPI
• US PPI
• CH Money Supply M2
• CH Foreign Direct Investment

Covid-19 update

Source: WHO, NICD

Economics and markets

• Participants are weighing the unrelenting rise in cases against the potential for further unbending policy support.
• If data continues to surprise to the upside, particularly in the US, the need for additional policy stimulus becomes questionable.
• The EM currency complex has capitalised on the positive global risk sentiment.
• Already marked as sub-investment grade, the SA sovereign is battling to maintain current ratings outlooks.
• USD/ZAR opens at 17.05; EUR/ZAR at 19.17; GBP/ZAR at 21.25 and CNY/ZAR at 2.42.

What happens when an unstoppable force like covid-19 meets an immovable object in the form of steady policy support? Confusion. 

Global markets are quite chipper this morning as European and Asian stock futures stroll about in the green. This, despite the WHO reporting a one-day high in global infections over the weekend! Timing is everything. Had this scenario played out three months ago, markets would have capitulated. But participants are weighing the unrelenting rise in cases against the potential for further unbending policy support, keeping markets on an even keel. For now. 

If data continues to surprise to the upside, particularly in the US, the need for additional policy stimulus becomes questionable. That begins to threaten the EM rally, which is contingent on Fed liquidity and a course correction in global growth. As an example, the CDS premiums for developing economies have been halved in the past three months to roughly 200bp, reflecting little to no regard for the rapidity of the rise in covid-19 cases or other idiosyncratic risks. 

The EM currency complex has capitalised on the positive global risk sentiment, up 0.7% this month per JP Morgan’s measure of FX performance. The rand is following suit, appreciating almost 2% over the last five days, despite still trailing its Mexican counterpart. As USD/ZAR hovers below 17.00, market participants are looking to 16.90. Appreciatory momentum might begin to peter out as the week progresses, with only a few global data publications to provide steer. Between the local case numbers and concerns over reform implementation, SA’s prospects remain dour. 

Already marked as sub-investment grade, the sovereign is battling to maintain current ratings outlooks as each of the agencies questions the efficacy of the proposed spending cuts. S&P, which was the first to cast SA into the junk status bucket in 2017, has questioned how the NT will rationalise spending over the observed period. The agency is doubtful that the NT’s debt stabilisation imperative can be achieved in the absence of meaningful growth. Lingering concerns that echo the cynicism expressed by bond holders, who, despite the positive carry trade return on local assets, remain wary of SA’s rising debt trajectory. True, foreign participation in primary auctions has improved, though non-resident appetite for bonds remains tepid on a year-to-date basis, with holdings falling below 40%. 

Following a relatively busy week on the data front, the local data calendar quietens down over the next few days. Our macroeconomics team stresses that the releases are, however, equally important. The SARB’s reserves data will be published alongside its asset and liabilities statement for June, which will give us further details of the bank’s net government purchases. Similarly, with business confidence, we expect consumer sentiment to have sunk to new historical lows as many consumers faced job and income losses during the hard lockdown. April’s manufacturing data will show the devasting impact of the hard lockdown on the sector’s output, evidenced in April’s manufacturing PMI decline as the business activity and new sales orders sub-indices plunged to record lows. 

The effect could be more prolonged if Gauteng reverts to higher levels of lockdown, though the dire economic consequences thereof is a huge counterbalancing force to the provincial health authorities advisory. Yet another example of the shield and spear paradox. 

Nema Ramkhelawan-Bhana

Local rates

If Friday’s inflation-linked auction is anything to go by, it appears that we are finally seeing the brunt of an oversupply of bond issuance. The market appeared relatively agnostic on the entire ILB curve as the auction stock cleared higher than market. The I2029 cleared at market (4.31), but the National Treasury only issued 100m of this linker stock and it had a bid-to-cover ratio of 7.20. The I2038s cleared auction at 4.76 (market 4.73) at a bid-to-cover ratio of 1.28, while the I2046s cleared auction at 4.82 (market 4.77) at a bid-to-cover ratio 1.25. 

The National Treasury issued 700m and 765m of the I2038s and I2046s, respectively, bringing the total to 1.565bn of linker stock, which indicated an under-allocation. While not the first time that this has happened, the spillover into the nominal bond market was unprecedented as the SAGB curve sold off post the disappointing auction. We are certainly seeing a repricing of curves, making tomorrow’s nominal auction an interesting affair. The rand is holding steady below the 17.00 handle and it poised to test the 16.90 support line today. Good luck out there! 

Tebogo Mekgwe