Global flash PMIs are encouraging

FX

July flash Markit manufacturing PMIs, reported yesterday, were generally positive. The reading for China came in higher than the anticipated 51.0 (Bloomberg consensus), at 52.0, a strong improvement on May’s 50.7. The Eurozone indicator of manufacturing activity also beat market expectations, coming in at 51.9, up slightly from 51.8 (Bloomberg consensus: 51.7). The services index for the Eurozone showed a strong improvement, to 54.4 from 52.8. This boosted the composite measure to 54.0 from May’s 52.8. The index for the US was lower than anticipated, although at 56.3 this is still a particularly high reading. All in all, the numbers indicate a promising start to Q3:14, although there are still many question marks around the momentum in the Eurozone. Official and final manufacturing PMI readings will be published next Friday.

Ending four consecutive days of appreciation, the rand weakened against the dollar yesterday, closing at USDZAR10.53, compared with Wednesday’s close of USDZAR10.51. Local currency depreciation occurred into dollar strength against most of the major crosses. The rand depreciated alongside a weaker performance across all commodity and most EM currencies we monitor for the purposes of this report. The dollar strengthened against the pound and the yen. Against the euro the dollar was largely unchanged. All but one of the EM currencies we monitor for the purposes of this report depreciated on the day. The exception was the INR which was unchanged. The rand was the second-best-performing currency in the commodity currencies category (beaten only by the NOK) and took up the third-best-performing slot in the EM currencies category (beaten only by the BRL and the INR). The rand traded between a low of USDZAR10.4658 and a high of USDZAR10.5435. Support from where the rand opened this morning sits at 10.4850, 10.4025, 10.3300 and 10.3050. Resistance levels sit at 10.5700, 10.6500, 10.7400 and 10.8500.

Turning to commodity prices, all the prices we monitor fell yesterday. Platinum and Brent were the hardest hit, both dropping 0.9%. Gold was also under pressure, falling 0.8%. Copper fell 0.3%. The ALSI fell by 0.6%, while the EM MSCI rose by 0.3%. The CBOE VIX index, a volatility proxy for global risk appetite/aversion, rose by 2.8%. The EMBI spread compressed by 5 bps and the SA CDS 5yr spread compressed by 4 bps.

Non-residents were moderate net sellers of local equities (ZAR487 million) and aggressive net sellers of local bonds (-ZAR1 903 million) on the day. Selling was seen across the curve; in the 3-7 (-ZAR912 million), 7-12 (-ZAR627 million), 12+ (-ZAR339 million) and 1-3 (-ZAR25 million) year buckets. Bond yields rose on the day by between 1 bps (R203) and 4 bps (R186). The 3x6 and 12x15 FRAs both rose by 1 bp, while the 6x9 FRA fell by 2 bps.

In local labour news, it is reported that Numsa’s acceptance of the latest deal offered by employers hinges on a clause related to futures negotiations. The clause, known as section 37, states that future cost-related employment issues be negotiated at the national level rather than company or plant level. Karl Cloete, Numsa deputy general security, has said “The settlement will stand or fall on section 37”. The union has until the end of today to accept the current offer.

FI

We may see some headlines coming out today from the SARB’s General Meeting, but we are unlikely to major changes to tone or speech so soon after last week’s rate hike. We expect another quiet day, with the FI market taking some direction from the currency, but few fireworks expected in the market.

At today’s ILB auction, NT is planning to raise up to ZAR800m across the I2025, I2038 and I2046. Following Tuesday’s nominal SAGB auction, NT raised an additional ZAR17m through the non-competitive bidding process yesterday; this amount was raised in NT’s new R2044, with no additional funds raised in the R2030 and R214.

The lower turnover numbers continue to remain, with ZAR14.9bn traded in local nominal bonds on Thursday. The R186 constituted a lower than usual 20.2% of turnover, while the R203 was 17.7% of turnover and the R2023 13.7% of turnover. The JSE has now recorded five consecutive days of foreign selling, totalling almost -ZAR6.5bn, which has put some pressure on the curve over the past week. While bond yields did tick slightly higher yesterday and the curve steepened, FRAs moved slightly lower. The R186 widened by 3.5 bps to 8.14% and the R213 was the weakest bond on the day, with a 5 bps move to 8.60%.

Non-residents were significant net sellers of nominal SAGBs yesterday, for a total of -ZAR1.90bn; this follows net selling of -ZAR1.55bn the day before, and a five day average of -ZAR1.28bn. Selling was again widespread and occurred across the curve, with barely any foreign inflows to offset the outflows. Foreigners sold -ZAR912m in the 3-7 year segment yesterday, due primarily to the R203 (-ZAR552m) and R207 (-ZAR412m). Foreigners sold -ZAR627m in the R2023 in the 7-12 year segment. The 12+ year maturity category recorded net selling of -ZAR339m, due mainly to outflows recorded in the R213 (-ZAR148m), R2048 (-ZAR142m) and R214 (-ZAR91m).

US Treasuries sold off across the curve yesterday. The yields on the 2yr and 5yr USTs rose by 2.43 bps and 4.64 bps to 0.49% and 1.69% respectively, and at the longer-end, the yields on the 10yr and 30yr notes rose by 3.70 bps and 3.18 bps, to 2.50% and 3.30% respectively.

EM FI markets delivered a mixed performance yesterday, while EM currencies sold-off overall. 5yr EM bond yields fell by around 1.00 bp on average and 10yr yields rose by just under 1.00 bp on average. SA’s FI market recorded a below average performance, with the 5yr yield rising by 0.80 of a bp and the 10yr yield rising by 2.70 bps. Turkey recorded the best performance yesterday, with the 5yr and 10yr yields falling by a relatively large 9.00 bps and 16.00 bps respectively. India recorded the second-best performance, with the 5yr and 10yr yields declining by 5.70 bps and 1.30 bps respectively. Thailand recorded the worst performance in the 5yr space, with the yield rising by 3.00 bps and Hungary recorded the worst performance in the 10yr space, with the yield rising by 7.00 bps. Brazil’s 10yr note rose by 6.80 bps.

EM currencies depreciated on balance yesterday. The Indonesian rupiah led the moves weaker, recording the largest incremental depreciation yesterday (0.53%) following a particularly strong performance the day before when the rupiah appreciated by 0.84%. Other EM currencies to depreciate notably yesterday were the Russian ruble, which recorded the third-best performance (0.56%), Russian ruble (0.38%), the Mexican peso (0.21%), the Thai bhat (0.21%), the Turkish lira (0.17%) and the Hungarian forint (0.16%). The rand depreciated by a more marginal 0.14%, along with the Polish zloty (0.13%) and Brazilian real (0.10%).

Trade balance data for Turkey is due out this morning (09h00). This could provide some direction to EM currencies if the results print out of line with consensus forecasts. Analysts surveyed by Bloomberg are calling for a trade deficit of -TRY7.00bn in June, from a previous monthly print of -TRY7.11bn. Brazil’s current account balance for June is due out later this afternoon. Consensus forecasts June’s print at -USD3.90bn, from a previous print of -USD6.64bn.

Latest SA publications

Fixed Income Weekly: Bonds rally as SARB's stagflation bind tightens by Asher Lipson and Kuvasha Naidoo (19 July 2014)

Credit & Securitisation Weekly: Market still quiet by Robyn MacLennan and Steffen Kriel (18 July 2014)

SA FICC Strategy: MPC meeting: doing what is required by Marc Ground and Varushka Singh (17 July 2014)

Credit & Securitisation Flash Note: Eskom Holdings SOC Ltd by Robyn MacLennan and Steffen Kriel (16 July 2014)

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Credit & Securitisation Special Report: Durable goods retail sector by Robyn MacLennan and Steffen Kriel (10 July 2014)

FI Flash Note: Fixed Income ALBI note: August ALBI reweighting by Asher Lipson and Kuvasha Naidoo (9 July 2014)

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