Recoveryonpause?

GM Daily: Recovery on pause?

 

Global: Increased geopolitical tensions between the US and China push asset markets lower

SA: Will probably see equity losses in line with global trends

Rand: Slightly weaker, but remaining below 17.00 against the US dollar

Local rates: Rand helps bond yields lower for now

 

What to watch today

 

• UK Monthly GDP
• UK Industrial Production
• UK Manufacturing Production
• GE CPI
• EC Industrial Production WDA
• SA Mining Production
• SA Mining Production
• US CPI

 

Covid-19 update

Source: WHO, NICD

 

Economics and markets

• SA’s assets have had a good July thus far, which is somewhat befuddling given the continued high rate of covid-19 infections and load-shedding.
• Global economic slowdowns become a risk once again as some US states and Hong Kong tighten covid-related restrictions.
• Increased geopolitical tensions between China and the US over maritime claims has pushed global equity markets lower overnight.
• Singapore’s 2Q20 GDP contracted by 41.2%, while China’s June trade showed improvements.
• SA mining production for May will be released later and is expected to show a recovery relative to April 2020.
• USD/ZAR opens at 16.86; EUR/ZAR at 19.12; GBP/ZAR at 21.16 and CNY/ZAR at 2.41.

 

The first two weeks of July have been kind to SA markets – the JSE Alsi is up 3.4% for the month, led by a 6.7% rise in the Fini15 and 4.0% in the Resi10. Adding to this would be the extraordinary strength displayed by the local unit, which is stronger by almost 3% against the greenback, over double the strength seen in other EM currencies such as the Brazilian real and Mexican peso. SA’s relative outperformance has many somewhat befuddled, as – let’s be honest – on the ground, things aren’t looking so good. It is bad enough that SA has joined the top 10 countries by number of confirmed covid-19 cases, but it is also entering the fifth consecutive day of stage 2 load-shedding. In response to SA’s rapidly increasing rate of covid-19 infections, we remain at level 3 of lockdown, albeit with some amendments. SA’s third-quarter recovery is now definitely coming under threat between the recent changes in level 3 regulations and load-shedding. 

SA is not alone in seeing a pause on economic activity, with California rolling back its planned economic reopening and the Bloomberg Consumer Comfort Index falling 0.4 points as restaurant bookings fell and initial jobless claims, while down from earlier highs this year, remain elevated. Hong Kong has also increased covid-related restrictions, having seen a substantial rise in its infection rate. It was the escalation of geopolitical tensions, though, which seems to have driven stock market movements overnight, as the US has rejected China’s maritime claims in the South China Sea.

As a result, the Dow closed flat after yesterday’s trading session, while the S&P 500 and Nasdaq closed in the red. Following this, Asia’s markets have fallen, with Hong Kong’s, China’s and India’s bourses all down around 1.5% and the Nikkei and ASX less negative. Thus, it will be the global trend that will probably push the JSE lower today, not necessarily domestic concerns. In the meantime, oil prices are lower, sitting around US$42/bbl as markets anticipate a tapering of the oil cuts implemented earlier this year at an OPEC+ meeting tomorrow. 

Data releases continue to advocate for a level of caution as the 2Q20 release of GDP for Singapore dropped by an eye-watering 41.2% SAAR, while China at least provides some hope with trade data printing better for June, but is vulnerable to reversals in economic activity, particularly in the US. Locally, we will see the May print for mining production later today. It is expected to continue to reflect a contraction compared to May 2019, but relative to April 2020 (SA’s hard lockdown), a relative recovery in production is expected. 

Siobhan Redford

 

Local rates

 

With the local currency managing to grind down to R16.66/US$ yesterday, the R186 managed to eke out small gains as well, and closed the day a point or two better than Friday’s close at around 7.70%. Given the strong move so far in the rand, one might have expected a better showing from the bond market, but again today’s looming auction does put the bulls on the back foot somewhat every time we approach Tuesday morning. This morning will be no different, with the rand giving back some of its recent gains overnight in a mildly risk-off sentiment change, given an escalation in Sino-US tensions and increasingly tighter covid-19 restrictions in the US pushing equity markets lower going into today.

Offshore investors were small net buyers yesterday (R250m), mostly on the longer end of the curve and hopefully that signals a change in pattern as they are still net sellers of around R2bn for the month. Their help will indeed be needed as we hit another auction this morning, with R2.2bn of each of the R186/R2030/R2048 strip on offer. We were surprised by last week’s auction in that the R2048 saw the most demand, but it had been off the run for two weeks so some pent-up demand was clearly there and is hopefully still there, along with interest for the two shorter bonds, which we expect to clear with less of a tail than last week.

Local mining production numbers for May are out this morning just after the auction at 11:30am and also watch for US CPI data this afternoon at 2:30pm. 

Deon Kohlmeyer