Sky high - RMB

GM Daily: Sky high

Global: S&P 500 reaches new highs

SA: Damning AG report on covid-19 procurement

Rand: Driven by EUR/USD, will probably remain below 17.00 to the US dollar

Local rates: Auction announcement drives curve flatter

What to watch today

JN Jibun Bank Japan Services PMI
CH Caixin China Services PMI
SA South Africa PMI
GE Markit Services PMI
EC Markit Services PMI
EC Retail Sales (y/y)
SA Electricity Production
US Nonfarm Productivity
US Unit Labour Costs
US Initial Jobless Claims
US Trade Balance
US Markit Services PMI

Covid-19 update

Source: WHO, NICD

Economics and markets

Having fallen from highs in February as covid-19 became a reality, the S&P 500 has recovered to February levels relatively quickly and has since surpassed them.
The slight disconnect between the US and Asian trading sessions continues with the Nikkei and ASX up over 0.8% and the Hang Seng and Shanghai Composite down over 0.5%.
The rand remains relatively robust, opening at 16.82 against the US dollar, weaker than yesterday, but remaining below the 17.00 mark.
Dollar weakness poses yet another challenge to the ECB, which has spent pretty much the entire period since the GFC and sovereign financial crisis trying to stimulate demand and push inflation higher.
SA faces its third consecutive day of load-shedding, now at stage 4, only three days into the month.
The AG has identified irregularities in procurement of PPE and the use of the TERS facility.
USD/ZAR opens at 16.82; EUR/ZAR at 19.94; GBP/ZAR at 22.45 and CNY/ZAR at 2.46.

The S&P 500 continues its meteoric rise this year. Having fallen from highs (at the time) in February, as covid-19 became a reality, to levels last seen in 2017, the S&P’s recovery has not been quite as fast as its collapse, but it has still recovered to February levels relatively quickly and has since surpassed these as investors diversify into utilities and materials. This is a good sign that markets are eyeing an economic recovery – tech stocks have benefitted from the global work-from-home trend which is why the Nasdaq has been the US superstar. Tuesday’s trend, where the Nasdaq’s daily increase was about double that of the S&P 500 and Dow, was turned around a bit on Wednesday, with the latter two bourses closing 1.5% and 1.6% higher relative to the Nasdaq’s 1% increase. At times like these, there will always be concerns about bubbles, which is sensible, as when news has been so bad, it is so easy to latch onto the good news and run with it. The slight disconnect between the US and Asian trading sessions continues with the Nikkei and ASX up over 0.8% and the Hang Seng and Shanghai Composite down over 0.5%. Trading on EM bourses in large part seems to be biased to the downside today and thus the JSE will probably see another flat to weak day.

The rand remains relatively robust, opening at 16.82 against the US dollar, weaker than yesterday but remaining below the 17.00 mark. The rand's movements against the greenback will be predominantly steered by dollar strength. After weakening to the 1.20 level against the euro following the Fed’s announcement of average inflation targeting, the greenback recovered to EUR/USD1.18 this morning. Dollar weakness, though, poses yet another challenge to the ECB, which has spent pretty much the entire period since the GFC and sovereign financial crisis trying to stimulate demand and push inflation higher. This strength will do exactly the opposite. It would seem the ECB is also undertaking a policy review which is expected to be completed by the end of next year, and no doubt its interpretation of how the Fed’s new policy will affect the euro will have to be incorporated.

Dollar strength could continue should the new jobless claims print stronger. The Bloomberg consensus suggests that this should fall to below the one-million mark, which would be very positive. Continuing claims are expected to remain above 14 million though, which means that there is still significant weakness in the US labour market.

Locally, the release of the South Africa PMI will give a broader view on SA’s economic activity after the very positive manufacturing PMI released earlier this week. Electricity production and consumption for July will also be released and, given that there was load-shedding in July, could see further deterioration. We know this will probably be the case for September as well, as SA faces its third consecutive day of load-shedding, now at stage 4, only three days into the month.

Further bad news came out of the Auditor General’s office yesterday, in which irregularities in the procurement of PPE and the use of the TERS facility were identified for further investigation. It is a sad reality that when there is a great amount of cash available for quick expenditure (as has been the case in the necessary response to covid-19 by the government), people will take advantage. While this is not just true in SA, this report is relevant to all South Africans as it is our current and future tax that pays for this expenditure.

In a bit of good news on the home front, it would seem that Comair, grounded in March due to the lockdown, and remaining so as it entered business rescue in May, could return to the sky by December as a plan for approval by shareholders and creditors has been formed. This would be just in time to transport South Africans across the country for the December holidays.

Siobhan Redford

Local rates

It feels like the market was caught short on Monday as coupon flows were re-invested, and bonds have managed to make substantial gains over the past three days. The National Treasury announced that the R186s, R2030s and the R2035s will be on auction next week, and the bond curve traded well post the announcement. The yield curve has approached its steepest levels in a while and the auction announcement was the catalyst needed to drive the yield curve flatter, led by a rally in the ultra-long end ticking 5bp lower.

With a general risk-on tone driving the market overnight, we should see bonds open on the front foot again. The market should be relatively rangebound till 11 as the non-comp options remain in the money. If all bonds are exercised, we could see the market trade slightly weaker as the market struggles to absorb the extra paper, but given the price action over the last three days and the shorter duration auction next week, the sell-off won’t be too pronounced. With very little data out today, bonds should take their cue from macro developments as we await tomorrow’s NFP result.