Lifeisacomplexmatter

 

Global: Exuberance dies down but risk-taking is still the order of the day    

SA: Delay in timelines to Eskom’s unbundling

Rand: Break of USD/ZAR17.00 opens the way for 16.88, though fundamental support is necessary

Local rates: Risk-on environment pushes bond yields lower 

What to watch today

• GE Markit Germany Services PMI
• EC Markit Eurozone Services PMI
• EC Retail Sales (y/y)
• SA Electricity Production (y/y)
• SA Electricity Consumption (y/y)
• US Trade Balance
• US Nonfarm Productivity
• US Unit Labour Costs
• US Initial Jobless Claims
• US Continuing Claims

Covid-19 update

Source: WHO, NICD

Economics and markets

• The exuberance that characterised Wednesday’s global trade is still abound, though adrenaline levels have eased.
• Ever-present US-China tensions and growing UK-Sino strains waft through the markets.
• The ECB is expected to boost its Pandemic Emergency Purchase Programme (PEPP) by €500bn this afternoon, even though it has spent less than a third of the €750bn already allocated.
• Bounding above 1.12, EUR/USD is trading on market enthusiasm, though the structural shifts to the eurozone economy are perhaps not being adequately accounted for.
• The pullback from USD/ZAR19.00 has been startling but requires fundamental support to sustain.
• The near two-year delay to the timeline for Eskom’s unbundling and the absence of a firm target date for the full legal establishment of the three subsidiaries isn’t as unnerving to the market as it could have been six months ago.
• USD/ZAR opens at 16.93; EUR/ZAR at 19.01; GBP/ZAR at 21.28 and CNY/ZAR at 2.38.

Walt Disney was a visionary. Not least for creating one of the most beloved characters of all time, but in capturing the essence of our existence. “I always like to look on the optimistic side of life, but I am realistic enough to know that life is a complex matter.” I could probably end the daily commentary there. Alas there are complexities to discuss. 

The exuberance that characterised Wednesday’s global trade is still abound, though adrenaline levels have decreased as the major barometers of risk-taking eased overnight. The tailwind fanning global indices higher has hit slight resistance as the ever-present US-China tensions and growing UK-Sino strains waft through the markets. Yet, momentum continues to support gains as major equities indices revert to pre-covid highs and the trade-weighted dollar retreats from its peak of 103, traded at the height of the March mania. 

While the Bloomberg dollar index is poised for its first gain in six sessions, its near 2.3% decline since 25 May reflects wider market optimism over the amplifying of stimulus measures and steady revival in economic activity. A point of inflection in global markets it seems, though the burden continues to fall to policymakers to provide the requisite first-aid to resuscitate their respective economies. 

The quantum of support doled out by the Fed is not easily matched, but its G3 counterparts have been forthcoming in providing what they deem to be reasonable levels of funding to sustain market functioning. The ECB is expected to boost its Pandemic Emergency Purchase Programme (PEPP) by €500bn this afternoon even though it has spent less than a third of the €750bn already allocated. A bold reactive central bank response paired with Germany’s €130bn stimulus package, agreed to after two days of intense negotiations, are incredibly positive for euro assets, not least the currency. Bounding above 1.12, EUR/USD is trading on market enthusiasm, though the structural shifts to the eurozone economy are perhaps not being adequately accounted for. The same can be said for most currency pairs. 

The rand has broken the 17.00 threshold against the US dollar amid a more positive risk environment which has permeated through SA’s local markets as bond and corporate credit interest grows. The rand’s six-month implied volatility has decreased notably since April, aligned to the expanded EM complex. While the risk of a blowout has receded, the spot level has lagged the performance of its comparable EM peers. Nevertheless, the pullback from USD/ZAR19.00 has been startling but requires fundamental support to sustain. 

The near two-year delay to the timeline for Eskom’s unbundling, and the absence of a firm target date for the full legal establishment of the three subsidiaries, isn’t as unnerving to the market as it could have been six months ago, as global determinants overshadow local changes. Energy constraints will return to the fore as businesses progressively reopen, which should accelerate demand and drag on the energy availability factor, currently above 70%. That depends largely on the pace at which the economy transitions toward level 1 as the complexities of the government’s risk-adjusted strategy continue to be debated. 

Nema Ramkhelawan-Bhana 

Local rates

With global sentiment not only in a risk-positive mood around emerging markets, but also the social unrest making developed markets less attractive, it’s hardly surprising we saw the rand break through the R17.05/$ technical level and close the day below the R17/$ level. The next target would be around R16.80/85 and, given the momentum, R16.50 seems achievable in the near term. This has obviously lent strong support to the bond market, with the whole curve around 10bp stronger yesterday and even managing to work its way through the R6.1bn in greenshoe options resulting from Tuesday’s auction. Offshore investors were split yesterday, with some reaching for the shorter R186s whereas we saw good demand from them for the ultra-long R2048 as well. 

Barring any surprises, we would expect the market to continue grinding lower, especially as we are back into coupon season after a dry (pun intended) April and May, with around R17bn to be paid out this month, with the biggest slice being the R186. 

No major local data today, but watch for the ECB at 1:45pm and its news conference at 2:30pm as well as US Trade and Initial Jobless Claims this afternoon at the same time. 

Deon Kohlmeyer