LadyLibertyandUncleSamwantyou!

RMB Markets Daily: Lady Liberty and Uncle Sam want you!

 

Global: Brace for a bumper US election week

SA: President to address the nation this week on second wave concerns

Rand: Unusually strong relative to EM peers

Local rates: Rand trading steady

 

What to watch this week

 

Monday

• JN Jibun Bank Japan PMI Mfg
• CH Caixin China PMI Mfg
• GE Markit/BME Germany Manufacturing PMI
• SA Absa Manufacturing PMI
• EC Markit Eurozone Manufacturing PMI
• UK Markit UK PMI Manufacturing SA
• US Markit US Manufacturing PMI
• US ISM Manufacturing
• US Construction Spending (m/m)
• SA Naamsa Vehicle Sales (y/y)

 

Tuesday

• US Factory Orders
• US Durable Goods Orders

 

Wednesday

• JN Monetary Base (y/y)
• CH Caixin China PMI Composite
• SA Standard Bank South Africa PMI
• GE Markit Germany Services PMI
• EC Markit Eurozone Composite PMI
• UK Markit/CIPS UK Services PMI
• EC PPI (y/y)
• US MBA Mortgage Applications
• US ADP Employment Change
• US Trade Balance
• US Markit US Composite PMI

 

Thursday

• JN Jibun Bank Japan PMI Composite
• GE Markit Germany Construction PMI
• UK Markit/CIPS UK Construction PMI
• EC Retail Sales (y/y)
• SA Electricity Production (y/y)
• SA Electricity Consumption (y/y)
• UK Bank of England Bank Rate
• US Initial Jobless Claims
• US Continuing Claims
• US Unit Labor Costs
• US FOMC Rate Decision (Upper Bound)

 

Friday

• JN Household Spending (y/y)
• SA Gross Reserves
• SA Net Reserves
• GE Industrial Production SA (m/m)
• US Change in Nonfarm Payrolls
• US Unemployment Rate
• US Consumer Credit

 

Covid-19 update

Source: WHO, NICD

 

Economics and markets

• US elections to set the tone for risk trading.
• Polls put Biden ahead, but the Senate race is crucial.
• Investors shy away from risk amid covid-19 concerns.
• Fed and BoE narrative amid rising case numbers will be crucial.
• Brexit offers glimmer of hope as does China manufacturing data.
• USD/ZAR opens at 16.24; EUR/ZAR at 18.95; GBP/ZAR at 21.02 and CNY/ZAR at 2.43.

 

Lady Liberty and Uncle Sam are common personifications of America, used during war times to garner allegiance and coax individuals into serving their nation. Over time, the characterisations of loyalty have changed but the message has remained the same. Americans are wanted. Arguably, the context is different. Rather than sign up for hand-to-hand combat, US citizens have been implored to cast their votes to safeguard their democratic rights. The pen is mightier than the sword. 

Pre-election day voting has already surpassed two-thirds of all 2016 votes! But there is a clear preference among Republican and Democratic supporters, with the former favouring on-the-day votes while the latter have largely opted to send their ballots in early via mail. The polls are narrowly favouring a Biden presidential win, but nothing is cast in stone and either outcome will probably be challenged. 

That makes for a volatile trading week, at least after the polls have closed. Results should start to filter in by Wednesday, providing a clearer view of the next Commander in Chief. More crucially though will be the Senate race. The Republicans hold a 47-53 majority in the upper chamber. If that is to sustain, then Biden will find himself hamstrung on key issues such as healthcare, immigration and climate change, if he secures the presidential seat. Neither party is going down without a fight, which implies erratic trading well into next week. 

The Fed’s decision on Thursday would otherwise take centre stage, but the committee is unlikely to veer from its narrative in an election week, instead reiterating its support to the market and data dependence, which is neutral for US treasuries and the US dollar. 

Peripheral to the US elections but no less important are the ongoing covid-19 developments in Europe, where rising case numbers continue to provoke March-like shutdowns, fuelling growth concerns in an already pained region. The UK’s four-week stay-at-home policy is a complete about turn by the PM, who pledged no lockdowns, but speaks to the severity of the situation and the absence of a vaccine. Johnson will attempt to avoid a Tory rebellion by assuring parliament today that it's only four weeks. That depends though on the effectiveness of the social distancing. EUR/GBP is trailing Friday’s close of 0.9 as both currencies succumb to domestic pressures. Brexit negotiations present a glimmer of hope. Talks are ongoing but a resolution on fishing rights and EU access to UK waters could be near. A key consideration for the BoE when it makes its rates pronouncement later in the week. 

While the West continues to bumble along, the East, or at least China, is making headway, registering a continued uptick in its monthly manufacturing PMI. In theory, that should buoy risk assets, but the global environment remains precarious, compelling investors to channel funds into safe-haven assets. The resulting decline in EM asset performance will probably endure. Despite being generalised, the losses are not filtering into the rand market, as the local unit continues to outperform the aggregate, meandering in a 16.20-16.50 trading range with no discernible reason why. 

The local backdrop remains sombre post MTBPS, with the President set to address the nation this week amid speculation of a reinstatement of strict measures to quell the second wave of covid-19. There is little chance of European-type shutdowns, especially as the economy limps along. However, we cannot afford to be complacent, especially as activity starts to improve at the margin. A phenomenon that this week’s data releases should support, though it is unlikely to move the needle on local stocks or bonds. That’s something only Lady Liberty and Uncle Sam can support. 

Nema Ramkhelawan-Bhana

 

 

Local rates

Local currency trading mildly stronger at the start of the new week and, more importantly, ahead of the much-anticipated US elections tomorrow. As expected, the overnight implied volatility is trading much higher this morning, around the 20.50% mark. Friday’s inflation-linked auction and overall flows across the desks are indicative of a cautious trading environment ahead of tomorrow’s election. Flows remain relatively thin, with offshore investors selling SAGBs on the back of last week’s MTBPS speech. With the FRA curve still pricing in another 25bp cut by the end of the year, the patchy liquidity and the oversupply of bonds appear to be taking their toll on the market.

Global equities are still reeling while risk-on sentiment is seemingly subsiding as emerging market bonds and equities see timid flows. We expect a relatively quiet trading session today, however, tomorrow’s SAGB auction could prove tricky to navigate as the National Treasury comes to market with R2030s, R2035s and R2040s. The ILB auction bonds cleared weaker relative to their respective mark-to-market as all three amassed bid-to-cover ratios below 2.00. Although flow is suppressed, local real money accounts appeared to be better receivers sub-10-yr on the swap curve, while they were better payers on the front end of the FRA curve.

Good luck out there. 

Tebogo Mekgwe