FX

Later today, the MTBPS will be tabled in parliament. For guidance as to the likely outcome, it is worth taking a look at recent comments made by SA’s new Finance Minister Nhlanhla Nene who faces his first big bi-annual budget event since his appointment. The market’s response to the outcome will likely to a large extent be determined by how government is seen to deal with cyclical risks to revenues – that is, to what extent it seeks to limit associated slippage in fiscal metrics. Expenditure delays recently hinted at by the Minister might be viewed as positive, but the benefit would be diluted if they are back-loaded and/or involve delays concentrated in capital expenditure. There could be some guidance around government’s position as an employer through public sector wage negotiations heading towards the expiry of the multi-year public sector wage deal this fiscal year in estimates of the wage bill (and perhaps any details as to the split between increases in wages and employee numbers) and the size of the contingency reserve. The contingency reserve represents budgeted but unallocated spending, and could be seen to serve to some extent as a very loose proxy for the distance between the budgeted wage increase – as government’s opening salvo into negotiations – versus where government thinks it might be required to settle.

Markets will also be on the lookout for any hints at tax regime changes under consideration heading towards the February 2015 Budget. New macroeconomic forecasts – especially economic growth forecasts – will be scrutinised to judge the believability of revenue and thus deficit targets. The more immediate impact of the MTBPS on the currency market will probably be via what it means for creditworthiness, and the probabilities surrounding the country’s debt ratings, especially in respect of the two agencies that have placed SA on negative outlook – namely Moody’s and Fitch. Any guidance as to how government plans to deal with the hole in Eskom’s financing equation could impact the pricing of government and Eskom debt, both in absolute and relative terms. Care should be taken, when assessing possible currency market impacts, to judge what the outcome might mean for monetary policy – that is, whether it reduces or increases pressure on the SARB to raise interest rates (by reducing or increasing fiscal accommodation).

September CPI numbers will be released this morning, ahead of the MTBPS. Bloomberg consensus has the headline figure falling to 6.1% y/y from 6.4% y/y. The fall in the y/y figure is largely owing to a sharp drop in the petrol price; 57c/l this September compared to a meagre 5c/l decrease in September of last year. Base effects also offer something of a downdraft to the headline y/y number, with a 0.5% m/m increase recorded in September last year. SGBS economist Kim Silberman is a bit more optimistic than consensus; she expects that the headline measure to dip to 6.0%, perhaps as a result of a more sanguine view than consensus regarding food prices pressures. Core inflation is pegged at 5.8% y/y by Bloomberg consensus, flat on the August reading. A softer inflation print, which would be interest-rate-friendly, could be rand-negative.

Yesterday’s story on Reuters that the ECB is considering corporate bond purchases suggests that the Bank is moving closer to quantitative easing. As our G10 FIC strategist Steve Barrow notes, this is a timely reminder that the Bank is putting policies in place that are likely to weaken the euro. A few years ago, when the ECB bought bonds, or at least threatened to buy them under the Open Market Transactions (OMT) plan, the bond market was in crisis and ECB support for bonds lifted the euro. But, today, there’s no crisis in government bonds, corporate bonds, or any other type of Eurozone bonds for that matter. Instead, buying bonds is all about raising the ECB’s balance sheet back to 2012 levels. Steve thinks that the ECB wants to do this in part because it knows that currency forecasters and investors watch balance sheets closely, and will hopefully turn more bearish for the euro as a result. The ECB won’t come out and say that it’s aimed at the euro, just as the BoJ never admitted targeting a weaker yen. But, just as the BoJ knew it needed to get the yen down, the ECB also knows that currency weakness is the best way to lift inflation quickly (or, in the current situation, stop plunging oil prices from pushing the Eurozone into deflation). Steve still sees 1.10 for euro/dollar in a year’s time.

Steve Barrow thinks that US CPI data will be of considerable interest to the market today, given fears that prices are still not rising in the way policymakers want. A month ago, the August core CPI came out flat in monthly terms, a full 0.2 percentage points below the market consensus. It is unusual for the market to miss by so much; usually expectations are out by no more than one tenth. For now, the market might see this as a one-off but, if something like this happens again today, it could revive risk aversion. For today, the consensus for the core CPI is for a rise of 0.1% m/m, although it is worth noting that almost as many analysts in the 80-person Bloomberg survey see a rise of 0.2% m/m. This skew suggests that, if core CPI does not rise 0.1%, it is most likely to rise 0.2%. However, on the other side of the coin, if the numbers are flat or negative, it would mean that 97.5% of survey participants have pitched their forecasts too high and that would clearly imply quite a shock for them – and for the market. Steve’s view is that core prices are likely to have risen 0.1% m/m, with headline prices also seen in line with the market median at 0.0% m/m. If Steve is right about this, the market reaction should clearly be limited, although the high number of forecasts for a 0.2% core rate might imply that bond yields will likely fall slightly if the results are in line with consensus.

Today’s UK MPC minutes should offer clues as to whether the central bank has been rattled by some key recent events, such as plunging stocks. Unlike the Fed, two UK MPC members have already been voting for rate hikes – namely Weale and McCafferty. The former made comments in the weekend press suggesting that he might be having second thoughts. But, even if he does not switch back to the neutral camp, it seems likely that the minutes will, at least, acknowledge some of the uncertainties that have recently arisen. Steve notes that this should help to validate recent price movements in short sterling futures.

The rand weakened against the US dollar yesterday after two consecutive days of strength, closing at USDZAR11.05 compared with Monday’s close of USDZAR11.02. Rand weakness against the greenback occurred into dollar against all of the major crosses, and a mixed to weaker performance from the commodity and EM currencies we monitor for purposes of this report. The dollar strengthened against all of the major crosses, with the biggest move seen against the euro (-0.7%). The rand weakened against the dollar and the yen, while strengthening against the euro and the pound. All but one of the commodity currencies we cover depreciated. The exception was the CAD. Five of the nine EM currencies we monitor for the purposes of this report – namely the MXN, TRY, ZAR, HUF and BRL – depreciated. The IDR, RUB, INR and THB meanwhile appreciated. The rand was the worst-performing commodity currency and the third-worst-performing EM currency (beating only the BRL and the HUF) on the day. The rand traded between a low of USDZAR10.9613 and a high of USDZAR11.0578 intraday. Support from where the rand opened this morning sits at 10.9600, 10.9130, 10.8000, 10.7500. Resistance levels sit at 11.0800, 11.1650, 11.2450, 11.3100, 11.3550.

Commodity prices moved higher. Copper rose by 1.7%, platinum and Brent by 1.0%, and gold by 0.1%. The developed market MSCI rose by 1.5%, the EM MSCI by a marginal 0.03% and the ALSI by 2.0%. The EMBI spread compressed by 2 bps and SA’s 5yr CDS spread compressed by 6 bps. The CBOE VIX index, a volatility based proxy for global risk appetite/aversion, fell by 13.4%.

Non-residents were aggressive net buyers of local bonds (ZAR1 986 million) on the day. Buying of bonds was seen across the 12+ (ZAR1 700 million), 7-12 (ZAR140 million), 1-3 (ZAR76 million)and 3-7 (ZAR69 million) year segments. Bond yields fell on the day by between 4 bps (R203 and R208) and 7 bps (R214) into a bull curve flattening. The 6x9 and 12x15 FRAs fell by 1 bp and 3 bps respectively. The 3x6 FRA was unchanged.


FI

Welcome to the MTBPS and CPI day. Today has the potential for a large amount of local risk. We have the local Fitch conference taking place this morning, with the sovereign presentation from 9:00 to 9:45 SA time. At 10:00, CPI for September will be released. We are slightly more optimistic than consensus, with SBGS’s economist Kim Silberman forecasting +6.0% y/y, vs consensus of 6.1% y/y, down significantly from the August print of 6.4% y/y. The deciding factor should be food inflation, with meat inflation staying stubbornly high. At 14:00, we have the main event of the day, with Finance Minister Nhlanhla Nene presenting his first MTBPS. We discussed the event at length in our FI Weekly on 17 October “MTBPS next week”. We will be looking primarily for the updates to growth forecasts, revenue and expenditure and the knock-on effect to borrowing. We do not think NT will increase the weekly auction sizes, but do expect them to increase the amount borrowed this fiscal year. Previous comments from the Minister suggested delays to some expenditure items. We also will be looking out for the update on Eskom’s funding. We are not expecting full details to be announced, and there may only be an announcement on the size of the package given to the SOE, but not necessarily what assets will be sold to finance the package.

SAGB turnover was recorded at ZAR20.0bn yesterday, with offshore investors’ net buyers of ZAR2.0bn of bonds. Only 24.6% of the turnover was due to the R186, with a further 31.8% of turnover coming from the three auction bonds. Bonds bull flattened on the day, led by an -8.5 bp move in the R2044 and the benchmark R186 moving -5.5 bps. FRAs drifted marginally lower. Non-residents were significant net buyers of nominal SAGBs yesterday for a total of +ZAR1.99bn. This was due to significant interest at the long-end, with the three auction bonds accounting for a total of +ZAR1.96bn of inflows. The 12+ year segment saw the bulk of foreign interest (both buying and selling), with +ZAR1.70bn purchased in this category overall. Notable net buying was recorded in the R2032 (+ZAR997m), R2030 (+ZAR556m), R214 (+ZAR463m), R2048 (+ZAR409m) and R186 (+ZAR105m) within this extended maturity category; this was partially offset by net selling in the R213 (-ZAR740m) and the R209 of close to ZAR100m. The only other notable transaction occurred in the R2023 (+ZAR140m) in the 7-12 year segment.

Tuesday’s nominal government bond auction of the R2030, R2032 and R2048 saw bids rise by almost ZAR2.00bn compared to the prior week’s disappointing auction. Pricing was strong in the R2030 and the R2048, which cleared below market levels, while the R2032, with the smallest amount outstanding across the SAGBs, cleared less competitively. The R2030 priced at 8.415%, 2.00 bps below its market trading level at the time, and the R2048 priced at 8.75%, 1.00 bp below. The R2032 cleared at a yield of 8.62%, 3.00 bps less competitively compared with its market level. Week-on-week, bids improved to ZAR6.90bn at yesterday’s auction to record a bid/cover ratio of 2.9x; this compares with bids of ZAR4.96bn at last week’s auction (bid/cover: 2.1x). The R2048 attracted the majority of investor interest, with 44% of the auction’s bids going to the bond. This was followed by the R2030, which received 33% of the auction’s bids, while the R2032 received the remaining 23%. The R2030 and the R2048 recorded relatively smaller proportions of fully allocated bids to total bids indicating higher demand for these two bonds. However, the R2032 recorded both a relatively lower level of investor bidding interest as well as a large proportion of bids being fully allocated. The R2030 received 43 bids, of which 7 were fully allocated and the R2048 received 43 bids, of which 9 were fully allocated. The R2032 received 33 bids, and 15 were fully allocated. Total auction bids rose week-on-week to 119 from 83.

Yesterday, Moody’s “placed on review for downgrade” the ratings of Edcon. The rating agency placed the rating on review due to “concern over Edcon's ability to proactively manage its debt profile and sustain its current capital structure amid the weakening operating environment in South Africa”. Three key reasons were Edcon’s “failure to reduce leverage”, “uncertainty about the company’s financial policy and near term objectives” and “a weakening macroeconomic environment in South Africa”. Moody’s has Edcon’s family rating on B3, the senior secured notes are rated B3, while the senior unsecured debt is rated Caa2. Standard & Poor’s rates Edcon CCC-, with a stable outlook.

US Treasuries weakened yesterday as yields rose across the curve. At the short-end, the 2yr UST rose by 1.19 bps to a yield of 0.36% and the yield on the 5yr UST rose by 2.26 bps to 1.43%. At the longer-end, the 10yr note rose by 3.08 bps to a yield of 2.22% and the yield on the 30yr note rose by 2.49 bps to 2.99%. EM FI markets strengthened overall yesterday. 5yr local currency sovereign yields fell by 5.37 bps on average and 10yr yields fell by 0.35 of a bp on average. SA’s 5yr yield performed in line with its EM peers, with the yield declining by 4.40 bps, just shy of the EM average. This was behind stronger moves recorded in Turkey (-19.00 bps), Russia (-15.09 bps) and Thailand (-4.50 bps). In contrast, 5yr notes in Mexico (+1.90 bps) and India (+0.50 of a bp) sold off. SA’s 10yr note fell by 5.20 bps, outperforming the EM average. This was behind stronger moves in Russia (-13.46 bps) and Turkey (-12.00 bps). In this longer-dated space, the yield on Brazil’s 10yr note rose by a relatively substantial 28.80 bps yesterday, followed by more marginal moves in Mexico (+3.80 bps) and India (+1.30 bps).

EM currencies recorded a mixed performance yesterday, selling off on balance as the moves weaker across the currencies were incrementally larger than the respective moves stronger. Amongst the moves weaker were the Brazilian real, which depreciated by the largest increment of 0.77%. The Polish zloty was the second-worst performer, depreciating by 0.53%, followed by the Hungarian forint (0.36%), SA rand (0.26%) and more marginal moves weaker in the Turkish lira (0.05%) and Mexican peso (0.02%). In contrast, the Indonesian rupiah continued to appreciate (by 0.26% yesterday) on positive sentiment regarding the formation of the new government cabinet. The Russian ruble (0.13%), Indian rupee (0.07%) and Thai baht (0.07%) also appreciated on the day.


Latest SA publications

SA FX Weekly: Oil price plunge & currency market spillover effects by Marc Ground and Varushka Singh (21 October 2014)

Fixed Income Weekly: MTBPS week by Asher Lipson and Kuvasha Naidoo (17 October 2014)

Credit & Securitisation Weekly: Pick n Pay reports H1:15 results by Robyn MacLennan and Steffen Kriel (17 October 2014)

Credit & Securitisation Flash Note: Calgro M3 Holdings Ltd by Robyn MacLennan and Steffen Kriel (14 October 2014)

Fixed Income Weekly: Moody's still to act on SA by Asher Lipson and Kuvasha Naidoo (10 October 2014)

Fixed Income ALBI note: November ALBI reweighting; R2032 joins the index by Asher Lipson and Kuvasha Naidoo (10 October 2014)

Credit & Securitisation Weekly: S&P comments on Eskom package by Robyn MacLennan and Steffen Kriel (10 October 2014)

Fixed Income Trade Idea: Receive 3x6, 5x8 FRAs by Asher Lipson and Kuvasha Naidoo (8 October 2014)

South Africa: Credit: SA property sector: Challenging environment ahead for office and industrial sectors by Robyn MacLennan and Steffen Kriel (8 October 2014)

SA FX Weekly: Asymmetric risk by Marc Ground, Bruce Donald and Varushka Singh (6 October 2014)

Credit & Securitisation Monthly: Quarterly update – Q3 2014 by Robyn MacLennan and Steffen Kriel (3 October 2014)

Fixed Income Weekly: Revenue slightly behind, issuance well ahead by Asher Lipson and Kuvasha Naidoo (3 October 2014)

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