Time flies

GM Daily: Time flies

Global: Pandemic and US-China fears spook markets

SA: July activity data to come into focus this week

Rand: Struggling as risk environment sours

Local rates: ILBs manage to find a bid in the market

What to watch this week

Monday

• JN GDP SA (q/q)
• JN Jibun Bank Japan PMI Mfg
• CH Caixin China PMI Mfg
• GE Markit/BME Germany Manufacturing PMI
• EC Markit Eurozone Manufacturing PMI
• UK Markit UK PMI Manufacturing SA
• SA Absa Manufacturing PMI
• US Markit US Manufacturing PMI
• US ISM Manufacturing
• SA Naamsa Vehicle Sales (y/y)

Tuesday

• JN Tokyo CPI (y/y)
• JN Monetary Base (y/y)
• EC PPI (y/y)
• US Durable Goods Orders

Wednesday

• JN Jibun Bank Japan PMI Services
• CH Caixin China PMI Composite
• SA Standard Bank South Africa PMI
• GE Markit Germany Services PMI
• EC Markit Eurozone Services PMI
• UK Markit/CIPS UK Services PMI
• EC Retail Sales (y/y)
• US Trade Balance
• US Markit US Services PMI
• US ISM Non-Manufacturing Index

Thursday

• GE Factory Orders WDA (y/y)
• GE Markit Germany Construction PMI
• UK Markit/CIPS UK Construction PMI
• UK Bank of England Bank Rate
• SA Electricity Production (y/y)
• SA Electricity Consumption (y/y)
• US Initial Jobless Claims
• US Continuing Claims
• SA SACCI Business Confidence

Friday

• GE Trade Balance
• GE Industrial Production WDA (y/y)
• SA Gross Reserves
• SA Net Reserves
• US Change in Nonfarm Payrolls
• US Unemployment Rate
• US Consumer Credit
• CH Trade Balance

Covid-19 update

Source: WHO, NICD

Economics and markets

• SA’s daily case rates appear to be subsiding, with the number of new cases falling below 10,000.
• Global lockdown 2.0 would be disastrous to the global economy and, by implication, risk assets, which are already struggling only a few hours into August’s first trading session.
• Covid-19 is the gamechanger, as this morning’s collapse in the Philippines’ markets shows, following a resurgence in cases in Manila, souring investor sentiment towards local stocks.
• Investors are at odds with the data and concerned about the simmering tensions between the US and China.
• This week’s slew of global PMI figures and US employment numbers could alter perception if the data continues to reflect a gradual improvement in activity, though the market is biased towards negative news.
• USD/ZAR opens at 17.05; EUR/ZAR at 20.06; GBP/ZAR at 22.34 and CNY/ZAR at 2.45.

It’s rather bizarre to think it’s August. A regular point of conversation around the virtual water cooler, I’m sure. The events of the last five months have completely changed the way we work and live. For many, working from home will probably be the status quo for the remainder of the year as we await a change in covid-19 fortunes. 

Daily case rates appear to be subsiding, with the number of new cases falling below 10,000. The risk though is that we become complacent, lulled into a false sense of improvement only to endure a second, more brutal wave. That, at least, is Hong Kong, the Philippines and Australia’s more recent experience, resulting in stricter social distancing protocols than were initially imposed. Even the UK is mulling the possibility of sealing off parts of the country if the number of infections spikes again. A lesson in patience for SA. 

Global lockdown 2.0 would be disastrous to the global economy and, by implication, risk assets, which are already struggling only a few hours into August’s first trading session. This is notoriously the most volatile month of the year given thinner liquidity. The 11.5% average increase in the VIX volatility fear index over the last 15 years is testament to how erratic price movements can be in what should be a relatively quieter trading month. Covid-19 is the gamechanger, as this morning’s collapse in the Philippines’ markets shows, following a resurgence in cases in Manila, souring investor sentiment towards local stocks. This, despite the continued improvement in China’s manufacturing sector, evidenced in the surge in the Caixin measure of the mainland’s PMI, which rose to a nine-year high. 

Investors are at odds with the data and concerned about the simmering tensions between the US and China which will probably manifest in a fresh round of penalties against “a broad array” of Chinese-owned software deemed to pose national-security risks to the US. TikTok was merely the proverbial straw that broke the virtual camel’s back. A less than cheerful backdrop against which risk currencies are expected to trade with weakness, already manifesting in a 0.08% drop in JP Morgan’s measure of EM currency performance. The rand reflects the broader EM anxiety, grappling with 17.17 against the greenback after bursting through the 17.00 mark in early morning trade. Gains will be hard won in this environment despite the US dollar’s recent weakening bias. 

This week’s slew of global PMI figures and US employment numbers could alter perception if the data continues to reflect a gradual improvement in activity, though the market is bias towards negative news, which could lead to exaggerated price movements. Gold remains the natural beneficiary in these turbulent times. Aided by the collapse in US real yields and the sustained challenge from the pandemic, there’s still room for gains in the spot and futures markets. A possible boon to SA’s terms of trade. 

Elsewhere though, the outlook for SA remains bleak, with the tourism sector desperate for a reprieve. This week will see the release of the manufacturing and SA PMIs, which should give us some indication of how the economy fared during July. The SACCI business confidence index will also be released, giving further insight into the quarter’s activity. As we stare down another week, we can only hope that developments are more cheerful than this morning’s bleak news. 

After all, time flies (even faster) when you’re having fun.

Nema Ramkhelawan-Bhana

Local rates

It looks like markets completely ignored the GBI EM rebalance, and the coupon payments drove price action on Friday. The R2023s led the pack, closing 14bp stronger on the day while the R2048s managed to close 3bp tighter. There also seems to be a dislocation between the currency and SAGBs currently. SAGBs have traded poorly over the past few months while the rand tracked lower, and that’s why we saw the bonds hold onto gains despite the rand blowing above 17 to the dollar on Friday. 

The inflation auction on Friday also surprised markets with the I2025s clearing 7bp through mark-to-market levels, the I2033s clearing 4bp through and the I2050s clearing at market. The break-even inflation levels on the I2025s are looking more and more attractive to investors and we could see the inflation curve start steepening up a bit in line with the nominal curve. 

We open today a touch higher, in line with the currency. Focus should remain on macro factors as there is very little local data out this week. 

Michelle Wohlberg