Hot,hot,hot

GM Daily: Hot, hot, hot

 

Global: Markets responding to positive news

SA: President reminds us of climate risks

Rand: Stronger as global risk appetite increases

Local rates: Stronger rand helps bond yields edge lower

 

What to watch today

• GE Private Consumption (q/q)
• GE GDP SA (q/q)
• SA Leading Indicator
• US House Price Purchase Index (q/q)
• US FHFA House Price Index (m/m)
• US New Home Sales
• US Richmond Fed Manufact. Index

 

 

Covid-19 update

Source: WHO, NICD

 

 

Economics and markets

• Geopolitical tensions continue to heighten, particularly between Germany and Russia, and India and China.
• The start of the GOP’s national convention also marks the intensification of President Trump’s re-election campaign.
• Markets seem to be more focused on the good news – in particular, that there appear to be multiple streams of progress towards treatment and the development of covid-19 vaccines, as well as pretty positive feedback on trade discussions between the US and China.
• With the NASDAQ continuing to reach new highs on the back of the great performance of tech stocks, the index is up 26.8% for the year.
• The rand has been one of the star performers after gaining over 1.2% against the US dollar, euro, pound sterling and Chinese yuan thus far this week.
• Releases of real economic data, such as the German GDP, expected during the course of today, could change market sentiment if surprising to the downside.
• USD/ZAR opens at 16.96; EUR/ZAR at 20.00; GBP/ZAR at 22.17 and CNY/ZAR at 2.45.

 

Spring is in the air, at least in the Southern Hemisphere. As the temperature rises here, it turns out the heat is not only increasing with seasonal changes, but also as geopolitical tensions continue to heighten, particularly between Germany and Russia, and India and China. And yet, this is still not the extent of temperatures rising as the start of the GOP’s national convention also marks the intensification of President Trump’s re-election campaign. Meanwhile, on the West Coast of the US, fires threaten many homes and add to health issues with poor air, while the hot air in the Atlantic around the Gulf of Mexico has the south-eastern states eyeing not one, but two tropical storms or hurricanes making landfall soon. Back home, it thus seems timely that President Ramaphosa, in his weekly letter to the nation, reminded us that after the acute covid-19 crisis, SA and the world continue to be confronted by a climate crisis. 

Markets seem to be more focused on the good news – in particular, that there appear to be multiple streams of progress towards treatment and the development of covid-19 vaccines, as well as pretty positive feedback on trade discussions between the US and China. This progress has buoyed markets, with the NASDAQ continuing to reach new highs on the back of the great performance of tech stocks. The index is up 26.8% for the year – remarkable progress, especially when we remember how dismal everything seemed just a few months ago. Covid-19 has effectively made it clear how many jobs can really be done remotely with the use of technology, taking a typically cyclical stock class and turning it into a recession hedge of sorts, at least this time around. The S&P 500 and Dow also traded higher yesterday and this momentum has continued into Asia. The Nikkei is trading over 1.3% up on the day and is eyeing gains of over 7% for the month. Lagging the Nikkei today, but still in the green, is the ASX, while the Hang Seng and Shanghai Stock Exchange are marginally down. The JSE closed yesterday’s trading session up 1.2%, thereby making up the lion’s share of the month’s gains of 1.6%, a more modest monthly performance compared to other indices, but contributing to the steady erasure of the year’s losses, with the year-to-date performance only -0.8% down. 

Market optimism in the form of increased risk appetite is not only being seen in equity markets but currency markets too, as many EM currencies have strengthened this week. The monthly performance is more mixed, but the rand has been one of the star performers after gaining over 1.2% against the US dollar, euro, pound sterling and Chinese yuan thus far this week, and is over 1% stronger against the US dollar for the month. 

It is the real economy and geopolitical happenings that could reverse risk appetite and asset market performance in the blink of an eye. While the US-Sino trade agreement seems to be back on track and a positive sign for cross-border cooperation, Trump continues to blame China for covid-19, thus reminding us that cracks in that particular relationship remain. Further, Huawei finds itself once again a pawn in geopolitical tensions with China, this time in India. The escalation of these, or the German-Russia tensions, or even internal issues such as contestation of the US election results, could very well reverse recent gains. Further, concerns remain about how well the global economy is actually recovering, and data releases of real economic data, such as the German GDP, expected during the course of today, could change market sentiment if surprising to the downside. Further evidence that the global economy is struggling is the closure of STA globally, making local news as the domestic offices ceased operation yesterday. 

While the temperature in markets oscillates on news flows, thus remaining uncertain, we know in SA that we will see temperatures increase steadily as we head into the summer months. Timely as it would seem, we have a vitamin D tablet shortage and so providing another reason to occasionally get up from our desks and go outside to enjoy the sunshine. 

Siobhan Redford

 

Local rates

Despite the rand breaking through the key R17/US$ psychological barrier yesterday, the local bond market found it hard to rally on the back of the currency strength as we head into another big National Treasury auction this morning. The market may be getting used to the bigger auction sizes to some degree, but R6.6bn is still a lot of paper to absorb week in and week out, never mind the potential for a similar amount to be sold via the green-shoe options every Thursday morning. Despite the looming supply, the R186 managed a 4 point gain yesterday and is not far off the recent intra-day low of 7.29% that we saw in mid-August, but it is quite telling that the rand was at R17.40/US$ at that stage, so one would have expected much lower yields with the current rand strength as well as R30bn in coupons hitting bond holders in less than a week’s time. 

Hopefully these coupons will start being put to work today and next Tuesday with the skew this week more to the shorter maturities, with the R186 and R2030 on offer as well as the ultra-long favourite R2048. Given the positive rand moves, the coupon flows and the shorter maturities, we expect the auction to clear reasonably well and not deviate much from last night’s MTM levels of 7.38/9.30 and 11.51% respectively. 

No major data out locally or in the US today. 

Deon Kohlmeyer