Hownottowinfriendsandinfluencepeople

GM Daily: How not to win friends and influence people

 

Global: US stimulus back on the table

SA: Eskom executive making all the right noises

Rand: Locked in a narrow trading range

Local rates: Flattening nominal curve bodes well for ILB auction

 

What to watch today

 

• UK Monthly GDP ((m/m))
• UK Industrial Production (y/y)
• UK Manufacturing Production (y/y)
• UK Trade Balance GBP/Mn
• US Wholesale Trade Sales (m/m)

 

Covid-19 update

Source: WHO, NICD

 

Economics and markets

• US stimulus back on the table, but personality politics are still at play.
• Renewed hopes of an agreed package inspire market gains.
• We might be through the worst, but the global outlook isn’t assured.
• Front-end USD/ZAR option vols are moderating as risk sentiment improves.
• USD/ZAR opens at 16.59; EUR/ZAR at 19.51; GBP/ZAR at 21.46 and CNY/ZAR at 2.44.

 

We’re spellbound by the on-again off-again relationship between the Speaker of the House and the US President. A comprehensive plan is back on the table after Pelosi’s rejection of the Republicans’ piecemeal stimulus approach prompted an about-turn by the White House on the size of a deal. The Treasury Secretary is almost a third wheel in this relationship, but nevertheless critical to the construction of an eventual deal. An almost impossible task when the commander in chief is tweeting that “Crazy Nancy is the one who should be under observation”. 

I know little of professional electioneering, but I gather that this isn’t the way to win friends and influence people. It’s a clear example of politics leading policy. Arguably a common occurrence globally, but its impact is far-reaching. Renewed hopes of an agreed package have inspired market gains, with the Euro Stoxx 50 futures edging towards its best week in almost three months, while the S&P 500 index makes steady gains. China’s stronger-than-anticipated yuan fixing and brisk travel over the eight-day mid-Autumn recess inspired Asian trade, with the MSCI measure of regional equities performance nearing its best level since 2018. The question is whether this outperformance will last, especially if China is dragged into the US election dialogue. 

Yes, we might be through the worst of the pandemic, and yes, leading economic indicators are showing signs of improvement, but – and there is always a but – the global recovery isn’t assured. You need only glance at the accompanying table to know that daily case rates in Europe are once again on the rise, exaggerating downside risk to the euro area as various lockdown measures are re-imposed. 

Indeed, August’s industrial production prints for Italy and France, due today, should reflect a slowing of momentum even before restrictions were re-introduced. As concerning as the outlook is, the ECB stands ready to deploy further stimulus, leading with QE as its tool of choice. In stark contrast to the US, fiscal accommodation agreed to in 3Q20 continues to provide critical assistance to the euro area – a key point of differentiation informing EU-US spreads. 

And what of the rand? Front-end option vols are moderating as risk sentiment improves, but at the gentlest of speeds as bearishness towards the rand, and much of the EM universe of currencies, wanes. Spot rand is anchored in the 16.50s and 19.50s against the greenback and euro, respectively. The 10c pocket should sustain in the absence of meaningful data today, limiting appreciatory momentum. 

As we close out another Twitter-filled week, we look to the next few days for guidance. Take heed of the IMF and World Bank’s observations at their annual meetings, commencing on Tuesday. Data will give way to dialogue as a host of ECB, Fed and BoE policy officials speak at various forums culminating in the second US presidential debate, which may or may not proceed depending on the incumbent as he snubs a virtual setting. As though that isn’t enough to spur volatility, markets will look to the Brexit end game and third-quarter US earnings reports. 

That could be enough to dislodge the rand from its trading range, though directionality depends on the outcomes. 

Wishing you a Twitter-free weekend. 

Nema Ramkhelawan-Bhana

 

Local rates

 

The local bond yield curve managed to flatten relative to the R186 yesterday to the tune of between 5-6 points, which is somewhat of a turnaround given the relentless steepening pressure we have seen recently. This was helped by both local and foreign investors buying the longer end of the curve and even though our stats show offshore investors as being net flat on the day, they did buy most bonds on the curve and sell R186s. This positive sentiment started after Tuesday’s nominal bond auction with both the R2040 and R2048 clearing 3.5 points through mid on the day. Surprisingly, not all the green-shoe options were taken up yesterday despite being a point or so in the money, which is another reminder that issuance is still very large and institutional cash is not endless. 

This positive sentiment should help demand for the ILB auction this morning as well. The National Treasury will be issuing the usual R2bn across the I2025/2038/2046 strip of ILBs today, and despite the relatively high duration on offer, we expect the market to clear around MTM on all three bonds as we have noticed structural local demand for these instruments, especially on the longer end of the curve which is well represented today with both the I2038 and I2046 on offer. 

No major data out locally or in the US today. 

Enjoy the weekend!! 

Deon Kohlmeyer