The words of Henry Ford ring true

GM Daily: The words of Henry Ford ring true

Global: Unprecedented EU fiscal support

SA: NT continues to push back on public sector wage increases

Rand: Flirtation with USD/ZAR16.50 persists. Strong global impetus required to shift lower

Local rates: Offshore selling continues

What to watch today

• UK Public Finances (PSNCR)
• UK Central Government NCR
• SA Leading Indicator
• US Chicago Fed Nat Activity Index

Covid-19 update

Source: WHO, NICD

Economics and markets

• Leaders of the EU dispelled my scepticism yesterday, agreeing to a landmark €750bn stimulus package offering respite to members in economic distress.
• Idiosyncratic risks aside, the unprecedented fiscal support is as powerful to financial markets as recent vaccine developments.
• Investors are choosing to prioritise actual and anticipated stimulus over high-frequency and equally volatile data.
• While Euro Stoxx futures remain upbeat, the euro is looking slightly deflated after extending to 1.1465 against the greenback.
• As USD/ZAR floats towards 16.50, it will require a strong global impetus to drive it lower.
• USD/ZAR opens at 16.68; EUR/ZAR at 19.05; GBP/ZAR at 20.95 and CNY/ZAR at 2.38.

“Coming together is a beginning. Keeping together is progress. Working together is success." – Henry Ford. 

The leaders of the EU dispelled my scepticism yesterday, agreeing to a landmark €750bn stimulus package offering respite to members in economic distress. A nod to the power of Franco-German persuasion after the leaders of Europe’s leading economies drafted a proposal of the relief fund in May. A combination of grants and low-interest loans will be utilised by member states, with Italy expected to be the largest recipient. Italy’s 10-year bond yields have rallied, narrowing the spread over its German counterparts to levels last seen in mid-February. It’s not an unfamiliar position for Italy, which has often had to extend a begging bowl. 

Idiosyncratic risks aside, the unprecedented fiscal support is as powerful to financial markets as recent vaccine developments. The reported progress by the University of Oxford and various pharmaceutical conglomerates at the forefront of human trial testing, paired with the next leg in US budget negotiations, is counterbalancing noisy data which continues to undermine the global recovery. 

Investors are choosing to prioritise actual and anticipated stimulus over high-frequency and equally volatile data. As technology stocks run rampant across Wall Street, Shanghai and Shenzen, equities benchmarks continue to outperform, carrying risk assets alongside them. The Nasdaq 100 rose almost 3% overnight, trading 21% above its 100-day moving average. The gap is the widest since the dot-com peak in March 2000. Slightly concerning, considering how that upsurge played out! 

While Euro Stoxx futures remain upbeat, the euro is looking slightly deflated after extending to 1.1465 against the greenback. At 1.1430, EUR/USD provides a sturdy base upon which EM currencies can trade, though momentum is fading as the stimulus-induced bliss peters out. Currencies will be left to their own devices, though commodity-linked units like the rand are at an advantage due to the recent upturn in metals prices. 

As USD/ZAR floats towards 16.50, it will require a strong global impetus to drive it lower. Risk conditions are in its favour for as long as active virus cases in perceived hotspots continue to recede. The local backdrop is less than flattering, but is less meaningful to the rand market for the moment, with much of the angst regarding growth and the fiscus priced into local currency bonds (refer to the local rates section). The National Treasury remains resolute on the unaffordability of higher public sector wages, calling rolling increases fiscally untenable. Labour and government continue to argue the socioeconomic merits of their respective cases, which is merely a reminder of the ongoing economic stress that will probably be reflected in May’s leading indicator. 

Nema Ramkhelawan-Bhana

Local rates

Offshore disinvestment has been quite a theme this year, with net selling close to R90bn already, despite what should be globally attractive yields. Yesterday saw a continuation of the theme, with sales of around R1.5bn in a very quiet market. With locals very quiet, this selling saw the R186 weaken slightly by around 2bp, but the longer end of the curve was steeper by around 5-7 points, probably also in anticipation of today’s auction. 

The National Treasury did try and take some pressure off the ultra-long end of the curve by not issuing there this week and instead opted for more of the belly bonds, with R2032s and R2037s available, along with the seemingly ever present R186 which had its sixth appearance in the last seven auctions. Hopefully, the stable rand and potential cuts on Thursday from the SARB will see some support for the auction today, but there is some concern for the R2037 which is not a popular stock (last auctioned early June and mid-April) and would not benefit as much from a rate cut as the much shorter R186, so hopefully the eye-watering 380 points yield spread between the two is enough to entice investors into the longer-maturity R2037. 

Locally, we have the leading indicator out at 9am in a very quiet data release day, so we expect a relatively busy morning into the auction but then activity to drop away later in the day.Deon Kohlmeyer

Deon Kohlmeyer