Intrepidtravellers

GM Daily: Intrepid travellers

 

Global: Markets await outcome of EU debate on mammoth fiscal stimulus

SA: Covid-19 cases exceed 324,000

Rand: USD/ZAR stuck in a holding pattern. Market awaits outcome of EU talks on fiscal stimulus

Local rates: Stability returns to the bond market

 

What to watch today

 

• EC CPI (y/y)
• US University of Michigan Sentiment

 

Covid-19 update

Source: WHO, NICD

 

Economics and markets

• 2Q20 US earnings reflect a cloudy US labour and consumer backdrop, undermining the notion of a quick turnaround in economic fortunes.
• US lenders are reportedly setting aside larger provisions for bad loans.
• The dour tone is echoed by Fed officials. Mindful of the circumstances, the Fed remains committed to policy support.
• For as long as policymakers extend a helping hand, the effects of the underlying data will be smoothed, limiting a March-like fallout.
• Europe is in an epic battle as its leaders debate the mammoth €750bn economic recovery fund.
• Markets are poised for a positive outcome as investors show a preference for European over US stocks amid hopes of a historic fiscal stimulus.
• The rand is in a holding pattern for the moment.
• USD/ZAR opens at 16.75; EUR/ZAR at 19.08; GBP/ZAR at 21.04 and CNY/ZAR at 2.39.

 

In Christopher Columbus’ pursuit of the Indies, he sailed west, discovering a new world. “For the execution of the voyage to the Indies,” he said, “I did not make use of mathematics or maps.” Like the intrepid explorer, market participants have followed the trail of overvalued cyclical stocks that has led them to believe in a sharp economic recovery.

Alike to Columbus, though, their bearings might be off, as 2Q20 US earnings reflect a cloudy US labour and consumer backdrop, undermining the notion of a quick turnaround in economic fortunes. The flurry of data over the last week has painted a dimmer picture of the US recovery. Jobless claims data showed a slower improvement in the labour market, while the rebound in US travel fades, threatening thousands of jobs. Lenders are reportedly setting aside larger provisions for bad loans, with the Bank of America expecting the recession to last well into 2022.

The dour tone is echoed by Fed officials. Over the last week, a handful of governors have referred to a worsening in conditions as infections continue to rise. Florida and Texas both reported record numbers of fatalities, while Miami registered a record number of ICU patients. Mindful of the circumstances, the Fed remains committed to policy support.

Granted, its balance sheet has tapered off in the last few weeks, but this is related to a gradual unwinding of FX swaps and lessening in the need for liquidity facilities. The point is that QE persists, with US$120bn being accumulated monthly, split between US$80bn in treasuries and US$40bn in mortgage-backed securities.

For as long as policymakers extend a helping hand, the effects of the underlying data will be smoothed, limiting a March-like fallout. A dearth of data today should help to steady the ship. It is both amusing and fascinating to note that markets have begun to turn a blind eye to Trump’s troublesome tweets, with his recent assaults on China being overlooked. Perhaps a reflection of his fading importance in the global conversation as the US elections draw near.

Biden now leads Trump by 15%, according to a new national poll, with voters seemingly losing faith in the President’s handling of the economy. Washington’s persistent agitation of China, manifesting in the potential blacklisting of TikTok to prevent China from obtaining personal data via the social media platform, will continue to distract from the challenges onshore. A familiar wartime tactic.

And speaking of wartime allies, Europe is in an epic battle of its own, as its leaders debate the mammoth €750bn economic recovery fund. Markets are poised for a positive outcome as investors show a preference for European over US stocks amid hopes of a historic fiscal stimulus. This is the fulcrum upon which EM currencies are trading. If an accord is reached over the weekend, the optimism will find expression in EUR/USD, the strength of which will feed into risk assets.

The rand is in a holding pattern for the moment, trading back up to 16.70 against the greenback as it seeks discernible global support. Range trading is the order of the day, despite a record number of single-day covid-19 fatalities being recorded locally. In isolation, the covid-19 numbers have had little bearing on the rand market thus far, with participants’ interpretation of its socioeconomic impact providing greater steer. All the while, the National Treasury remains mum on its role in the financing of SAA, with little indication of whether it would provide the necessary monies should the “mobilisation of funding” prove unsuccessful. Further messaging on this topic becomes crucial to the local bond market, which remains reasonably quiet for now.

Nema Ramkhelawan-Bhana

 

Local rates

With the bond market seemingly now more comfortable with the increased issuance on the nominal side (which was less than 10%, to be honest, from R6.1bn to R6.6bn), we turn to the ILB market today where the absolute size increase was slightly larger (only R600m) but the percentage increase was closer to 50% from the previous R1.4bn per week to R2bn now. 

After a shaky start, with the first of the increased size auctions ending up some R400m short in allocations by the National Treasury, last week’s auction saw total bids of over R3bn, up from R2.5bn the previous week and a full R2bn allocation by NT. Given the fact that ILB yields have only marginally strengthened since last week, we expect a similar story today, with the auction clearing at or slightly above last night’s MTM levels of 4.45%, 4.885% and 4.945% on the I2029, 2038 and 2046, respectively, which are the bonds on offer this morning. The R186 opens a touch weaker this morning on the back of a weaker rand, with 7.60/7.54% the opening double and no trade yet. 

On the currency front, watch for any news out of Europe on progress or finality on its rescue fund, which will have a significant effect on EUR/USD and, by implication, USD/ZAR as well. No major data is out locally, only US housing starts and the University of Michigan’s Sentiment Index, out at 2:30pm our time, are of some interest. 

Deon Kohlmeyer