Local bonds rally

FI

Today may see the market take a slight breather after two days of aggressive rallying in the local market and a stable overnight currency. Finance Minister Nhlanhla Nene will be speaking this evening at an event hosted by the Centre for Education in Economics and Finance in Johannesburg. We only see PPI in local data today, with the quartet of money supply, private sector credit, trade balance and the budget balance all due tomorrow. After the market’s rally, we would expect all non-competitive auction bids to be taken up today. National Treasury has released a statement that the non-comps for the R2032 will return to the normal level of 50%, effective 2 September, as the bond is likely to breach the ZAR10bn outstanding level. Non-comps in the R2044 will, however, remain at 100%.

Wednesday was a big day for SAGBs in all respects, with high turnover, a rallying curve and offshore investors buying for a second consecutive day. This did not appear to be a reaction to local only factors, but was rather a fairly strong day for EM. The JSE recorded turnover at a massive ZAR37.8bn in nominal SAGBs and a further ZAR1.09bn in ILB. As is usual, the R186 comprised the majority of turnover (24%), followed by the R157 (16%). Bonds past the R186 represented an additional 27% of turnover. The entire curve rallied, apart from the soon to be split R157, by more than 11.5 bps. The curve bull steepened, led by moves in the R203 (-19.0 bps), while the R186 strengthened by 15.0 bps and back-end bonds were 11.5 – 12.5 bps stronger.

Offshore investors were recorded as net buyers of slightly over ZAR1.6bn of nominal SAGBs, buying the back-end and selling front-end stock. The 12+yr bucket saw inflows of +ZAR2.78bn, whilst the 1-3yr bucket saw net selling of –ZAR449m (all in the R157) and the 3-7yr bucket selling of –ZAR762m. In the back-end, offshore bought R213 (+ZAR659m), R186 (+ZAR630m), R2030 (ZAR545m), R2048 (+ZAR443m), R209 (+ZAR419m) and R214 (+ZAR139m). The 3-7yr bucket saw selling in the R208 (-ZAR337m), R203 (-ZAR292m) and R204 (-ZAR116m).

The US curve flattened, as the 2yr UST moved 2 bps weaker and the rest of the curve rallied. 10yr USTs are now trading at 2.36%. EM CDS spreads rallied lower by 2 – 4, but the corporate iTraxx Xover and Europe indices weakened on the day. The average 5yr local currency EM sovereign bond strengthened by -2.8 bps, led by SA (-13.7 bps) and Hungary (-5.0 bps). Slight weakness was evident in Russia (+1.9 bps) and China (+1.0 bp). 10yr LC EM sovereign bonds strengthened by an average of -6.8 bps, with Brazil (-30.8 bps), South Africa (-13.5 bps) and Hungary (-10.0 bps) the strongest movers. Russia (+1.4 bps) and Indonesia (+1.1 bps) were the only countries were 10yr yields weakened.

The Turkish Central Bank kept its benchmark one-week repurchase rate unchanged at 8.25%, following higher inflation in July that was blamed on a drought. This paused three months of rate cuts. The overnight borrowing rate was also kept unchanged, at 7.5%, but the overnight lending rate was unexpectedly cut by 75 bps to 11.25%. Today sees the country’s current Prime Minister, Recep Tayyip Erdogan, sworn in as President, while the current Foreign Minister, Ahmet Davutoglu, will be sworn in as Prime Minister.

FX

Tomorrow sees key CPI data for the Eurozone in August and, as a forerunner to that we will see German CPI data today. The consensus is for flat CPI in m/m terms, with the skew in the forecasts lying to the high side of the consensus by a margin of two to one. Our G10 FIC Strategist, Steve Barrow’s view is that the data will be in line with the consensus, and that this would leave the annual rate steady at 0.8%. It would also be broadly consistent with a fall in the annual rate for the Eurozone tomorrow from 0.4% to 0.3% - which is the consensus call – although there are clearly many other countries to report their own CPI data. If the market thinks a sub-zero monthly figure today from Germany is more likely to cause an easing from the ECB next week, the euro is likely to suffer and yields are likely to slip.

German CPI data will probably garner more attention than the Eurozone M3 data. However, Steve feels that the monetary data is just as significant. The market thinks that the data will show a 1.5% annual growth rate for M3 and a 1.3% 3-month average growth rate. Steve sees the risks being to the downside and, as usual, will be looking to see if the data encompasses weakness in lending. Last time, annual private sector lending was falling at a 1.7% pace and, for July, the consensus is for -1.5%. Steve expects the data to be soft once again – but also expects the market reaction to be limited.

Bloomberg consensus sees the second estimate of US GDP for Q2:14 being revised slightly lower. The consensus is for 3.9% after the provisional 4% figure, and the skew on the 75-person survey is to the downside as well, by a margin of 31 to 21. Steve thinks that the data will be in line with the consensus but, given the skew on the forecasts, he advises being a bit more wary of soft data, and hence biased towards the long side for bonds and the short side for the dollar.

PPI inflation data for July will be published today. In July last year, the headline figure climbed 0.7% m/m (sa), which could lead to a deceleration in this July’s y/y reading. Analysts are anticipating producer inflation to slow to 7.9% y/y, from 8.1% y/y in June. Signs of easing pipeline inflation pressures could be rand-negative via what this implies for monetary policy – that is, makes tightening less likely.

The rand strengthened further against the US dollar yesterday, closing at USDZAR10.61, compared with Tuesday’s close of USDZAR10.68. The rand appreciated into dollar weakness against the major crosses, and in tandem with a stronger performance from almost all commodity and EM currencies. The dollar weakened against the euro, the pound and the yen, with the biggest move seen against the pound (0.22%). The rand appreciated against all of the major crosses, with the biggest move seen against the dollar (-0.63%). All but one commodity currencies we monitor for purposes of this report appreciated on the day, the exception was the NOK, which depreciated just slightly. All but one of the EM currencies we monitor appreciated on the day. The exception was the INR. The rand occupied the second slot in both the commodity and EM currencies categories (beaten by the CAD in the former category and by the BRL in the latter category). The rand traded between a low of USDZAR10.6006 and a high of USDZAR10.6901. Support from where the rand opened this morning sits at 10.6000 10.5250 and 10.2500. Resistance levels sit at 10.6600 10.7400 10.7800 and 10.8250.

Turning to commodity prices, Brent and platinum both rose by 0.2%, and gold rose by 0.1%. Copper meanwhile fell by 0.3%. The ALSI fell by 0.3%, while the EM MSCI rose by 0.6% on the day. The EMBI spread compressed by 3 bps and SAs 5yr CDS spread compressed by 6 bps. The CBOE VIX index, a volatility proxy for global risk appetite/aversion, rose by 1.3%.

Non-residents were moderate net buyers of local equities (ZAR316 million) and were once again aggressive net buyers of local bonds (ZAR1 609 million). Buying of bonds was seen in the 12+ (ZAR2 778 million) and 7-12 (ZAR42 million) year buckets. Selling was meanwhile seen in the 3-7 (-ZAR762 million) and 1-3 (-ZAR449 million) year segments. Bond yields fell by between 12 bps (R214) and 19 bps (R203) into a meaningful bull curve steepening. The 12x15 FRA fell by 2 bps; while 3x6 FRA was unchanged and the 6x9 FRA rose by 1 bp.

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