Ending the week in the red

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Ending the week in the red

GM Daily: Ending the week in the red

Global: Higher initial jobless claims point towards a slower US economy

SA: SARB continues to provide accommodation to floundering economy

Rand: Slightly weaker as risk-off makes a return

Local rates: Hawkish SARB sees yield curve flatten

What to watch today

UK GfK Consumer Confidence
CH Bloomberg July China Economic Survey
UK Retail Sales Inc Auto Fuel (y/y)
GE Markit/BME Germany Manufacturing PMI
EC Markit Eurozone Manufacturing PMI
UK Markit UK PMI Manufacturing SA
US Markit US Manufacturing PMI
US Markit US Services PMI
US Markit US Composite PMI
US New Home Sales
US New Home Sales (m/m)

Covid-19 update

Source: WHO, NICD

Economics and markets

In retaliation to the US demanding that China close its consulate in Houston, China has now demanded that the US close its consulate in Chengdu.
News that US initial jobless claims reversed its declining trend this week, for the first time since it spiked earlier this year, suggests that the economic fallout from covid-19 will linger in the world’s biggest economy.
In line with economic realities, risk-off trading has continued into the Asian trading session today and should see the All Share close lower.
The SARB delivered yet another interest rate cut after its July meeting, this time cutting by 25bp.
USD/ZAR opens at 16.67; EUR/ZAR at 19.33; GBP/ZAR at 21.23 and CNY/ZAR at 2.38.

It should come as no surprise that in retaliation to the US demanding that China close its consulate in Houston, China has now demanded that the US close its consulate in Chengdu. It seems the spat between China and the US will continue simmering along until one side capitulates. Of course, markets tend to get skittish when geopolitical tensions escalate, and adding fuel to this fire is the news that US initial jobless claims reversed its declining trend this week, for the first time since it spiked earlier this year, suggesting that the economic fallout from covid-19 will linger in the world’s biggest economy. Some good news is that continuing claims fell, which does at least indicate that there is some employment activity. The real concern here is that the unemployment support in the US comes to an end next week, and there still seem to be some issues delaying further stimulus injections into the economy.

Markets have responded as expected, with US bourses falling – the S&P 500 was down 1.3%, the biggest drop in a month, and the Dow and NASDAQ followed suite. The downward trend was not limited to the US, with Brazil and Toronto’s bourses both closing Thursday’s trading session in the red. This adjustment of financial markets, in line with economic realities, has continued into the Asian trading session, with China, Hong Kong, Korea, Australia and India’s bourses all trading down between -0.5% and -2.8% today. This risk-off behaviour should continue into our trading session today – the All Share closed 0.42% higher yesterday and has made gains of 3.1% for the month, however, by the end of today, this will probably be slightly lower. EM currencies are reflecting current market sentiment, falling overnight, with the rand 30 cents off its strongest levels against the US dollar, and we expect it to reflect this weakness for the day. The price of Brent crude oil has also fallen to below US$44/bbl in response to increased economic concerns.

Back home, the SARB delivered yet another interest rate cut after its July meeting, this time cutting by 25bp. The repo rate now stands at yet another historic low at 3.5%, nonetheless, it is clear the MPC is seeing the end of the cutting cycle. We believe that its inflation and growth projections remain a bit optimistic and only if it revises these further downward would the MPC see more space for accommodation. In this respect, the MPC has reiterated its data dependency at this point, also emphasising the need for structural change to truly boost the domestic economy. In this light, we could take the President’s statement last night that corruption must be dealt with swiftly and decisively as a positive, but this will be even better received once we see consequences being dealt out. In his speech, the President also announced that schools are to be closed from next week for four weeks while SA experiences the peak of its covid-19 infections. Grade 12s will only be away for one week and Grade 7s two weeks, though, which will hopefully limit the extent to which their final years of high school and primary school are pushed out.

As the weekend beckons, remember to observe social distancing protocols and wear your masks when in public. The threat, especially here in Gauteng, is now higher than ever. Stay safe and keep well.

Siobhan Redford

Local rates

With the SARB governor sounding pretty hawkish in terms of monetary policy going forward, as well as the MPC vote only going 3/2 in favour of the 25 point reduction versus no move, the market’s reading seemed to be the obvious – that we are pretty much at the end of this cutting cycle – but also, on the positive side, at least from the SARB’s point of view, that the “panic” is over and some normality is returning to the bond market. The combination of these was a huge flattening of the curve, with the R186 some 4 points weaker on the day, the belly some 10 points stronger and the ultra-long end rallying 20 points. Despite the 25 point flattening in the R2048/186 spread, the curve does remain steep though, and with the gap still at around 385 points, the long end does still reward investors with decent yields to compensate for the fiscal risks SA bonds come with.

On the ILB front, we have again seen some steepening of the curve as investors, both foreign and local, take advantage of the implied break-even levels offered by the shorter end of the curve, with the I2025 particularly popular this week. Hopefully this demand continues into this morning’s ILB auction, with R2bn again on offer across the I2025/46/50 strip of bonds. As mentioned, we have seen tactical demand for the I2025 recently, but there is also good demand for the longer end of the curve as we near the 5% real return level, especially from longer liability managers as well as defined benefit type funds.

Usually post-MPC Fridays start off with a flurry of trading but then quieten down in the afternoon, and we expect this to be the case again today given that the market was expecting the 25 point cut, the rand has been stable of late and there is no real major data out locally or in the US today. Enjoy the weekend!!