A setback

GM Daily: A setback

Global: AstraZeneca trial halted

SA: Business sentiment for third quarter out today

Rand: On the back foot after poor GDP print, vulnerable to further weakening on poor global sentiment

Local rates: IRS grinding lower

What to watch today

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

Covid-19 update

Source: WHO, NICD

Economics and markets

Boris Johnson has threatened to break international law by unilaterally changing parts of the Brexit accord with the EU in a “specific and limited way”.
AstraZeneca trial for a possible covid-19 vaccine has been halted after one participant in the trial had an adverse reaction.
This reignited fears that the global economic recovery will take longer than had been anticipated and has driven the price of oil back to sub-$40/bbl levels.
US markets started their first trading day of the week by closing deeply in the red as the Nasdaq lost over 4%, the S&P 500 2.8% and the Dow 2.3% of their value.
Asian markets have followed suit and this risk-off sentiment will probably see the JSE suffer a similar fate.
SA’s 2Q20 GDP printed at -51.0% q/q SAAR as lockdown caused a broad-based economic slump.
The rand weakened by 20c against the dollar in response to the GDP release and remains vulnerable to further weakness.
USD/ZAR opens at 16.94; EUR/ZAR at 19.96; GBP/ZAR at 22.00 and CNY/ZAR at 2.47.

Boris Johnson is the politician that has managed to dominate global headlines overnight, an impressive feat at a time in which US politics seem to be the focal point. The reason: a threat to break international law by unilaterally changing parts of the Brexit accord with the EU in a “specific and limited way”. The fallout has been almost immediate with even members of his own party expressing concerns. While the international community seems to have been relatively quiet, there can be no doubt that should Mr Johnson go ahead with such a proposal, it would mean that other countries would treat any deal-making with the UK with caution going forward – in short, it would be a severe reputational risk. The international investor community has made its mark, pushing the pound weaker.

Of more immediate concern though is the news that the AstraZeneca trial for a possible covid-19 vaccine has been halted after one participant had an adverse reaction. This is a setback in our quest to return to pre-covid economic and social activity and has had an immediate impact on global sentiment and markets. It does not mark the end of hope though, as such setbacks do occur in medical trials and the suspension of the trial will give the researchers and scientists involved the chance to understand the nature of the reaction and refine the vaccine. It is also worth remembering that this is not the only vaccine that is currently being trialled.

Nonetheless, this does represent a delay of sorts and has reignited fears that the global economic recovery, and any return to normality, will take longer than had been anticipated, which has driven the price of oil back to sub-$40/bbl levels and reversed market movements. US markets started their first trading day of the week by closing deeply in the red as the Nasdaq lost over 4%, the S&P 500 2.8% and the Dow 2.3% of their value. Adding to the sentiment driving markets lower was the continued disagreement on a new stimulus plan for the US by Republicans and Democrats, and continued concerns over rising infection rates in the EU and UK, illustrating the ongoing threat covid-19 poses to economic activity. Thus, Asian markets have followed suit with the ASX leading the rout, down 2.6%, followed by the Nikkei, Shanghai Stock Exchange and Hang Seng with more muted declines.

SA’s 2Q20 GDP print, released yesterday, surprised largely to the downside, with a contraction of 51.0% q/q SAAR. This drove the rand about 20c weaker against the dollar. The current environment in which risk is seen to be elevated could push the rand even weaker today. The JSE will probably suffer the same fate as risk-off sentiment draws global flows away from EMs.

Looking more closely at the release of SA’s second quarter GDP, it is clear that almost every sector suffered reduced economic activity as SA experienced first a hard lockdown and then only marginally easier levels of lockdown during the quarter. The only sectoral shining light was agriculture, as SA faces a particularly good summer crop, and conditions for winter crops have also been assessed to be positive. Household consumption expenditure plummeted, as did exports, and the fall in investment deepened. Today, we will see the release of the RMB/BER Business Confidence Index for the third quarter which should give an indication of how further easing of lockdown restrictions has impacted business sentiment and activity.

Siobhan Redford

Local rates

The tragic second quarter GDP print reversed all the gains that the rand had made against major currencies, pushing it towards the 17.00 handle towards the close of business. We open this morning’s trading session with the currency middling at 16.95 with a 17.00 resistance level and remaining vulnerable with an ever-present weakness-bias. Yesterday’s GDP print highlighted the dire situation that the South African economy finds itself in, both the rates and currency markets are reflecting investor uncertainty around the speed of economic recovery and general economic outlook. With market liquidity dwindling, the interest rate derivates market appears to be the hardest hit with no real receivers in the swap space; the 5-yr and 10-yr tenors are trading at 5.01 and 7.00, respectively. Packs are trading light, but we saw local fast money expressing interest in the 5-yr/R186 yesterday, while local fast money were better payers of the 1x4 FRA. With the swap curve grinding lower, the possibility of a 25bp rate cut before the end of the year cannot be excluded. On the nominal spectrum, we saw better buying interest across the curve from locals. The curve has certainly steepened a notch with the R2044/R186 and R2048/R186 spreads trading in excess of 412bp this morning. Yesterday’s nominal auction didn’t spark a lot of interest, with the R2030s and R2035s clearing weaker than market. The R186s cleared auction at 7.22 (market 7.24) with a bid-to-cover ratio of 2.31, the R2030s cleared auction at 9.19 (market 9.16) with a bid-to-cover ratio of 1.73, while the R2035s cleared auction at 10.84 (market 10.82) with a bid-to-cover ratio of 1.91.