Tito draws his SABre

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Tito draws his SABre

Global Markets Daily: Tito draws his SABre

Global: Mixed response to rising cases and improving data

SA: Special adjustment budget to define short-run fiscal future

Rand: Rangebound as market awaits the budget

Local rates: R2030s demand continues

What to watch today

JN PPI Services
GE IFO Business Climate
SA CPI
US MBA Mortgage Applications
SA Retail Sales
US FHFA House Price Index
SA Special Adjustment Budget (SAB)

Covid-19 update

Source: WHO, NICD

Economics and markets

The Finance Minister will draw his sabre as he presents the special adjustment budget (SAB) this afternoon.
To recap: revenue underperformance and higher expenditure will see the budget deficit widen to 13.6% of GDP.
Notwithstanding the additional borrowing requirement borne of a higher deficit, we believe that the NT will be reluctant to increase domestic issuance.
Alternative funding mechanisms, void of additional domestic nominal and ILB issuance, would be welcomed.
The rand market should mimic movements in local fixed income, trading gingerly ahead of the budget.
USD/ZAR opens at 17.24; EUR/ZAR at 19.48; GBP/ZAR at 21.59 and CNY/ZAR at 2.46.

Recessionary conditions, ever-increasing unemployment levels, dehydrated corporate profitability – the battle ground upon which the Finance Minister will draw his sabre as he presents the special adjustment budget (SAB) this afternoon. His is a perilous fight. Revenue shortfalls, expenditure cuts, SoE solvency risks and rising debt levels pose formidable challenges. Casualties are unavoidable and victory isn’t assured. The fight, though, is a necessary one if South Africa is to emerge victorious, albeit battered and bruised.

We’ve spoken at length about the various permutations based on our macroeconomic assumptions, which are far more bearish than the estimates touted by government following the Nedlac presentation last Friday. To recap: revenue underperformance and higher expenditure will see the budget deficit widen to 13.6% of GDP – compared to the NT’s February estimate of 6.8%. Even in the best-case scenario, the consolidated budget deficit for FY20/21 will be almost double February budget’s estimate. Notwithstanding the additional borrowing requirement borne of a higher deficit, we believe that the NT will be reluctant to increase domestic issuance in an environment where yields are at historic highs. This is the fulcrum upon which the local market is teetering.

Alternative funding mechanisms, void of additional domestic nominal and ILB issuance, would be welcomed, inspiring a relief rally that would manifest in a possible flattening of the SAGB curve. Amid the uncertainty of fiscal cliffs and debt traps, the market yearns for reform measures that can translate into fundamental improvements to rouse better interest at primary auctions, and in the absence of which market participants will continue to show caution.

Regardless of the instrument traded, the behaviour is the same. The rand market should mimic movements in local fixed income, trading gingerly ahead of the budget. A mildly positive outcome would allow for meaningful appreciation against the greenback, provided that USD/ZAR17.20 is breached. The global backdrop remains wobbly. Investors continue to temper their appetites for risk with the acceleration in covid-19 cases across the US.

Anthony Fauci, the top US infectious disease expert, has warned states against throwing caution to the wind as lockdown measures are rapidly relaxed. As the WHO’s lead, Dr Tedros, continues to stress, “It’s not a choice between lives and livelihoods. Countries can do both.” More than 100,000 cases have been reported in the last 100 days by the US. But the Fed’s Bullard may clarify comments today that he is not seeing risks on the scale of the tech bubble or the mid-2000s. Meanwhile, European data is sprightly, showing signs of improvements in PMI. Markets are fatigued by the uncertainty. The lethargy is being expressed in listless trade across Europe and Asia, though Kim Jong Un’s suspension of military action is providing modest relief. He might well have an actual sabre!

Nema Ramkhelawan-Bhana

Local rates

The demand for R2030s continued as it cleared very strong relative to market in yesterday’s auction, with the market yielding 9.25 ahead of auction, the R2030s cleared at 9.18 with a bid-to-cover ratio of 3.64. The R2035 failed to attract any decent auction interest with a bid-to-cover ratio 1.79, it cleared at 10.89, having traded around 10.85 going into the auction.

The ultra-long cleared auction at 11.37 (market 11.39) with a bid-to-cover ratio of 2.09. We saw some offshore names come in yesterday, with a few local fast money accounts dabbling in the R2030s, but on the day we saw better selling interest across the nominal curve and tiny buying cares in the R2037s and two-way flow on the R186s.

The linker market had local real money expressing selling interest ahead of CPI later today, while the IRD desk saw local real money accounts looking to receive out to 15-yr. The currency is trading cautiously ahead of the much-anticipated budget speech. Good luck out there!