Time is of the essence

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Time is of the essence

GM Daily: Time is of the essence

Global: Backdrop less favourable due to political risks

SA: National Assembly to consider NT’s request for MTBPS postponement

Rand: Leading the pack with no discernible catalyst for recent gains

Local rates: ZAR holding steady amid MTBPS postponement

What to watch today

JN Industrial Production (y/y)
EC Industrial Production WDA (y/y)
US MBA Mortgage Applications
SA Retail Sales Constant (y/y)
SA Retail Sales (m/m)
US PPI Final Demand (y/y)

Covid-19 update

Source: WHO, NICD

Economics and markets

National Treasury has requested a one-week delay to the tabling of the MTBPS
Markets are intrigued, perhaps even startled by the request
NT is already in an unenviable position of having to curb budget expenditure and stabilise debt
Yet one thing is for certain – change is imminent
The global environment isn’t as favourable as one would expect
Between the wave of US banks’ 3Q20 earnings reports, the UK’s last-ditch attempts to agree a deal with the EU and renewed lockdown risks across Europe, investors are likely to call in sick today.
USD/ZAR opens at 16.47; EUR/ZAR at 19.35; GBP/ZAR at 21.32 and CNY/ZAR at 2.44.

There are no clever quips or analogies today. Time is of the essence. The National Treasury has requested a one-week delay to the tabling of the MTBPS, which is usually delivered at the half-way mark of the financial year. The reasons for the Minister of Finance’s proposed rescheduling are clear: “Recent complex decisions taken by cabinet in respect of the 2020/2021 adjusted estimates and the 2021 medium-term expenditure framework, as well as the implications of the time frames for the finalisation of [the] government’s economic reconstruction and recovery plan on the budget process”.

Markets are intrigued, perhaps even startled by the request, which will be considered by the National Assembly. The NT is already in an unenviable position of having to curb budget expenditure and stabilise debt. The ideas underpinning the active scenario laid out in the Special Adjustment Budget in June are challenging at best and possibly deepened by the ask of the long-awaited recovery plan. Treasury is at pains to show the necessary fiscal discipline without choking growth.

The NT’s proposals, including the use of zero-based budgeting, have come under intense scrutiny, not least from the President’s economic advisory council. The implications of these interventions and assessments are unclear. It’s all conjecture at this point. Yet, one thing is for certain – change is imminent. South Africa is on the precipice of large-scale reform that might require short-term pains to beget long-term gains. This is a necessary sacrifice that will require a firm social compact.

Domestic markets seem impervious to the noise but we’re only a few hours into trading and yesterday’s residual nominal bond auction energy (see local rates) could fast fade if reports fuel concerns over a less palatable MTBPS. Cash is still being deployed and positions churned albeit at a snail’s pace as investors lie in wait. The global environment isn’t as favourable as one would expect with the IMF’s upward revision of its 2020 growth forecast seemingly falling on deaf ears.

That’s because the risks are still apparent. The IMF said “With renewed upticks in COVID-19 infections in places that had reduced local transmission to low levels, re-openings have paused, and targeted shutdowns are being reinstated. Economies everywhere face difficult paths back to pre-pandemic activity levels.” This makes policy stimulus even more crucial, leaving markets vulnerable to the war of words between the US House and Senate, which are still at an impasse.

It is difficult to discern the driving force behind rand gains amid the pessimism. The broader EM FX complex is struggling according to the MSCI measure, down 2%, with the rand starting to lose a bit of shine but still stronger on a month-to-date basis versus the US dollar. The local unit should gravitate toward the upper bounds of its recent 16.40 to 16.60 trading range amid a less constructive global backdrop.

Between the wave of US banks’ 3Q20 earnings reports, the UK’s last-ditch attempts to agree a deal with the EU and renewed lockdown risks across Europe, investors are likely to call in sick today. Granted, implied volatility up to the 1-year point across the EM spectrum has decreased but inflows are still left wanting. Perhaps China’s further economic opening and supply-side reform could inspire some action today but it’s likely to be isolated to the Asian giant without extending to its EM peers.

Nema Ramkhelawan-Bhana

Local rates

The local currency is holding steady around 16.50 despite the Finance Minister submitting a request to the Speaker of the National Assembly to have MTBPS postponed by a week to 28 October. With a backdrop of negative global news, the local currency appears to be looking for some much-needed direction. We had local real money accounts selling USDZAR yesterday possibly in anticipation of a “rand-friendly” MTBPS, but the majority of EM currencies battled against the greenback yesterday. Global equities also struggled to make a meaningful impact yesterday; EM bonds managed to record inflows at the start of the week despite the risk-off sentiment lingering in the air. The local 10-year bond showed its prowess yesterday as it recorded the highest bid-to-cover in yesterday’s nominal auction.

The R186s cleared auction at 7.15 (market 7.1650) at a bid-to-cover ratio of 2.83, the R2030s cleared auction at 9.40 (market 9.42) at a bid-to-cover ratio of 3.61, while the R2044s cleared auction at 11.70 (market 11.71) with a bid-to-cover ratio of 2.35. With the bond auction well attended in the morning session, bonds rallied with strong bids for the front-to-belly area of the curve. The R2032s closed at around 10.41 while the auction stock ended the day around the clearing levels. We had local fast money receiving the front end of the FRA curve while the market battled to find meaningful receivers around the sub-15-year on the swap curve. Good luck out there.