PMIs point to global growth resilience

FX

Preliminary October PMI readings for the world major economies, released yesterday, were relatively steady. This should allay recently escalating concerns over the state of the global economy. The global manufacturing PMI was largely unchanged in October, edging only marginally lower to 52.6 from 52.7, which Capital Economics asserts is still consistent with relatively robust growth during the month – around 4% annualised, according to their calculations. The Markit US manufacturing PMI fell to a still particularly strong 56.2 from 57.5. The reading for the Eurozone managed to show a modest improvement and, more critically, remained above the contraction/expansion threshold of 50.0, coming in at 50.7; this was up versus September’s 50.3. Japanese manufacturing activity also improved in October, with the PMI number at 52.8, compared to the previous month’s 51.7. Signals of a more resilient global growth environment would be positive for the rand from a cyclical and external demand perspective.

The ECB releases its Asset Quality Review (AQR) and stress tests of 130 of the largest Eurozone banks on Sunday. Steve Barrow (our G10 Strategist) acknowledges that it is hard to comment on the state of market expectations around these tests, but he believes that if 10 or more banks run afoul of the ECB in either review, the market may be disappointed. Steve notes, though, that it is not just about the number of banks; it’s just as much about the extent of capital shortfalls and the country’s worst hit that will have a bearing as well. For instance, if one or more banks are seen to have real viability issues as a result of the capital raising required, it could have very negative ramifications. It would raise concerns that the bank/s would have to seek ESM financing or possibly impose losses on bond holders. Similarly, if any ECB criticism is seen to be overly concentrated on one country’s banks, this too could make the market fret. However, Steve thinks it more likely that Sunday’s release will support the euro and Eurozone stocks.

The rand strengthened for a second consecutive day against the US dollar yesterday, closing at USDZAR10.98, compared with Wednesday’s close of USDZAR11.00. Again, rand appreciation against the greenback occurred despite dollar strength against all of the major crosses. The commodity currencies we monitor for purposes of this report put in a mixed performance. EM currencies posted a mostly weaker performance. The rand also strengthened against the euro, pound and the yen – with the largest move seen against the yen (1.3%). Three of the commodity currencies we cover appreciated against the dollar yesterday – namely the NOK, ZAR and CAD. The AUD and NZD both depreciated. Among the EM currencies we monitor for the purposes of this report, only the TRY and ZAR appreciated. The INR was unchanged; all of the others depreciated. The rand was the second-best performer in both categories. It is possible that the rand was supported by a continued improvement sentiment towards SA generated by signals of a commitment by government to containment of fiscal slippage in the MTBPS, which was tabled in parliament on Wednesday. The rand traded between a low of USDZAR10.9241 and a high of USDZAR11.0222 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.

Precious metals were on the backfoot yesterday, with gold and platinum falling 0.8% and 0.5% respectively. Meanwhile, Brent and copper prices rose by 2.5% and 0.2% respectively. The developed market MSCI rose by 0.8%, while the EM MSCI fell by 0.5%. The ALSI fell 0.2%. The EMBI spread compressed by 3 bps, while SA’s 5yr CDS spread widened by 2 bps. The CBOE VIX index, a volatility based proxy for global risk appetite/aversion, dropped by 7.5%.

Non-residents were net sellers of local equities (-ZAR458 million) but were moderate net buyers of local bonds (ZAR338 million) on the day. Buying of bonds was seen in the longer-dated 12+ (ZAR490 million) and 7-12 (ZAR148 million) year segments. Selling occurred in the shorter-dated 1-3 (-ZAR224 million) and 3-7 (-ZAR76 million) year buckets. The yield curve nevertheless held close to steady. Bond yields at the front of the curve were unchanged (R203 and R208), while the R186 and R214 both rose by 1 bp. This followed a sharp rally on Wednesday, thanks to a softer than expected CPI result for September and a bond-friendly MTBPS. The 3x6 FRA rose by 1 bp, and both the 6x9 and 12x15 FRAs rose by 2 bps each, reversing just a small portion of the strong gains made on Wednesday.

FI

Today sees NT offer up to ZAR800m across the R212, I2038 and I2025 inflation-linked bonds. It should be another quieter day leading into the end of the week, but any big currency volatility could give bonds a second shot in the arm. For now, we think it unlikely that bonds get aggressively bought at current levels and would favour selling at this level in the R186. There may also be some pressure this morning after US Treasuries drifted higher yesterday.

It was a slightly calmer day yesterday after all the CPI and Budget enthusiasm on Wednesday. The JSE recorded turnover of ZAR19.6bn, with the R186 accounting for 32.8% of turnover, the R207 accounting for 10.1% of turnover and the non-comp stocks adding 19.2% of turnover. Offshore investors were marginal net buyers of ZAR332m, net selling the 1-3yr (-ZAR224m) and 3-7yr (-ZAR76m) buckets, but net buying the longer dated 7-12yr (+ZAR148m) and 12+yr (+ZAR490m). Foreign buying was heaviest in the R2032 (+ZAR645m), R2030 (+ZAR485m), R2048 (+ZAR235m), R214 (+ZAR167m) and R2023 (+ZAR148m). Offset was due to selling in the R213 (-ZAR535m), R186 (-ZAR488m), R203 (-ZAR172m), R207 (-ZAR152m) and R2037 (-ZAR148m).

There were marginal moves in the bond curve yesterday of -0.5 to + 1.0 bps, with only the R207 tightening. All bonds from the R186 and further out weakened by 1 bp. FRAs drifted slightly higher with further out points 3 bps higher. US Treasuries moved yesterday, with a 6.7 bp move in the 5yr and a 5.5 bp move in the 10yr, which is trading this morning at 2.25%.

There was a full 50% take-up in non-comps yesterday; an additional ZAR401m in the R2030, ZAR402m in the R2032 and ZAR376m in the R2048. As we saw in the Budget, non-comp take-up has been higher than NT expected, allowing them to effectively boost long-term domestic debt issuance without increasing weekly auction sizes.

EM curves steepened on average yesterday, with 5yr 0.4 of a bp stronger on average and 10yr 2.5 bps stronger on average. Turkey was the strongest mover in both maturities; -6.0 bps in both tenors. South Africa was a middle of the pack performer in both maturities. Russia saw weakness in both tenors, while Brazil led the weakness in the 10yr, widening by 14.6 bps. Brazil is faced with some uncertainty going into Sunday’s second-round election, with markets waiting to see whether current incumbent Dilma Rousseff or the opposition’s candidate Aecio Neves will win.

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

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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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