Is the second wave forming?

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Is the second wave forming?

Global Markets Daily: Is the second wave forming?

Global: Risk-off trading in the wake of new spike in coronavirus infections in Beijing

SA: A quiet day ahead of Youth Day

Rand: To trade weaker around the 17.20-17.40 level on risk-off trade

Local rates: ILB auction clears at market

What to watch this week

Monday

CH Industrial Production (y/y)
CH Retail Sales (y/y)
EC Trade Balance
US Empire Manufacturing

Tuesday

GE ZEW Survey Expectations
EC ZEW Survey Expectations
US Retail Sales Advance (m/m)
US Industrial Production (m/m)
US Capacity Utilisation
US Manufacturing Production

Wednesday

JN Trade Balance
UK CPI (y/y)
EC CPI (y/y)
US MBA Mortgage Applications
US Housing Starts

Thursday

UK BOE Rate
US Initial Jobless Claims
US Leading Index

Friday

JN National CPI (y/y)
GE PPI (y/y)
SA Bloomberg June South Africa Economic Survey
EC ECB Current Account SA
US Current Account Balance

Covid-19 update

Source: WHO, NICD

Economics and markets

Market sentiment is cooling as fears of a second wave of covid-19 in China emerge, with a spike in infections in parts of Beijing leading to partial lockdowns in affected areas.
China’s industrial production rose by 4.4% y/y in March, up from January’s low of 1.1%, while retail sales contracted by 2.8% y/y in March, an improvement on February’s contraction of 7.5%.
The domestic equity market should be strongly influenced by global movements today as flows will probably be thin, with SA observing Youth Day tomorrow.
SA’s covid-19 infections have now topped 70,000, while our recorded deaths will almost inevitably breach 1,500 people today.
With a preference for traditional safe havens in the current risk-off environment, the rand will trade around levels of between 17.20 and 17.40 to the US dollar.
USD/ZAR opens at 17.06; EUR/ZAR at 19.25; GBP/ZAR at 21.38 and CNY/ZAR at 2.43.

It has been a frosty weekend for many South Africans as winter truly sets in – almost appropriate when we see market sentiment cooling as fears of a second wave of covid-19 in China emerge, with a spike in infections in parts of Beijing leading to partial lockdowns in affected areas. This turn to risk-off can be seen in the fall in US futures and the Asian trading session this morning. Brent crude oil has followed suit, falling off its above-$40/bbl trading levels seen last week. Limiting the downside has been the relatively good news out of China that industrial production rose by 4.4% y/y in March, up from January’s low of 1.1%, while retail sales contracted by 2.8% y/y in March, a significant improvement on February’s contraction of 7.5%.

The domestic equity market should be strongly influenced by global movements today as flows will probably be thin, with Youth Day observed tomorrow and many South Africans taking Monday off work to create a long weekend. Furthermore, a lack of data will provide limited information as to how the domestic economy fared during the first half of the year, and how it is surviving the easing of lockdown. The only data which will be released will be the official statistics for SA’s covid-19 infections, which have now topped 70,000, while our recorded deaths will almost inevitably breach 1,500 people today. The rand, like the domestic market, will probably follow global trends, right now with a preference for traditional safe havens in the current risk-off environment, and will trade around levels of between 17.20 and 17.40 to the US dollar.

For those in the office today, enjoy the relative calm, as while today will be particularly quiet, and the week not particularly busy, it is the inevitable calm before the data storm that is to follow next week with the release of March’s retail sales, April’s CPI and the mooted release of the NT’s re-jigged 2020 budget.

Siobhan Redford

Local rates

The ILB auction proved that there was still some interest for longer-dated ILB stock, as the I2025s cleared auction at 3.72 at a bid-to-cover ratio of 1.16. The I2033s cleared auction at 4.44 at a bid-to-cover ratio 1.75, while the longest bond on offer (I2046s) cleared auction at 4.58 at a bid-to-cover ratio of 3.39. The National Treasury had issued 500m, 645m and 255m for I2025s, I2033s and I2046s respectively. While activity remained constrained on Friday, there were some selling cares around the belly area of the ILB curve, while on the nominal front, local real and fast money accounts were better buyers of R186s around the 7.65 level. The struggle for liquidity in the IRD space continues while local fast money accounts are closely watching the price action on the 5-yr/R186 packs which closed around 2.31 on Friday afternoon. In the interest rate vol market, we are seeing better buyers of R186s puts from local real money while fast money accounts remain better buyers of straddles out to August. We expect a quiet trading day ahead of tomorrow’s public holiday.