Greece nerves settle; rand steady

The rand was remarkably steady yesterday after a nervous start to the day.
Equity markets took the brunt after the news that Greece had called a referendum, for Sunday, on a deal with its creditors.
US and German bonds benefited from the uncertainty in international markets.
This morning, risk appetite is back, with equity markets in Asia rebounding strongly.
Keep an eye on oil as negotiations around Iran’s nuclear ambitions continue.
NERSA announced the ruling on the tariff application of Eskom yesterday.
SARS will release the preliminary trade data at 14h00 today. Bloomberg consensus is for the trade deficit to widen to -ZAR3.1 billion in May from -ZAR2.5 billion in April.
Tactically, we would continue to approach the rand from the short side against the collar.
Support for the USDZAR is at 12.1800 and 12.2100; resistance is at 12.4050 and 12.500.

International developments

The rand was remarkably steady yesterday. It initially went up to 12.40 against the dollar but managed to claw back losses. Currently, it is around 12.25. Although the rand is steady, tactically we would continue to approach the currency from the short side against the collar. Support for the USDZAR is at 12.1800 and 12.2100; resistance is at 12.4050 and 12.500.

Equity markets took the brunt of the pain yesterday after the news that Greece had called a referendum on a deal with its creditors for Sunday. Most major equity indices across Asia, Europe and the US closed down 1.5% or more, with the S&P and Dow indices in the US closing down 2.09% and 1.95% respectively, erasing YTD gains. One only needs to turn to the VIX index to get a sense of how nervous equity markets were yesterday. The VIX index – a measure of implied equity market volatility - closed at 18.85% yesterday, up from 14% on Friday. Yesterday’s close was the highest since February this year.

However, bonds benefited from the uncertainty in international markets, with the US 10-year bond yield falling from 2.47% on Friday to the current 2.31%. German bonds were also stronger, with the 10-year yield falling from 0.92% to 0.79%.

Local bonds did not perform as well, with the benchmark R186 closing 18bps higher at 8.36. However, we would not be surprised to see some support for local bonds returning this morning given the steady currency, stronger USTs and the fact that NERSA did not grant Eskom the application for higher electricity tariffs (which should ease inflation concerns in the medium term).

This morning, risk appetite has returned, with equity markets in Asia rebounding strongly. Most major indices are in the green so far – even the Shanghai Composite in China, which declined 21% in the past 10 trading sessions are up 3% in early morning trade today. It seems that Greece nerves have been shrugged off.

We keep a close eye on oil as negotiations around Iran’s nuclear ambitions continue. Although the deadline was set for today, indications are that good progress towards a final deal has been made and talks are likely to continue past the deadline. A deal with Iran may put downward pressure on oil given that a deal could see Iran slowly starting to export oil to international markets again.

Local developments

NERSA announced the ruling on the tariff application of Eskom yesterday. With Eskom not pursuing the full environmental levy of 2.3%, Eskom reduced its application to an additional 9.6% (on top of the 14.2% already approved). In the event, NERSA denied Eskom the permission to increase prices and noted that Eskom’s application for a price increase was incomplete. NERSA, however, indicated that Eskom could make a full, new request to NERSA for an increase. A lower electricity tariff should improve the inflation profile for the rest of 2015 and 2016 marginally.

SARS will release the preliminary trade data at 14h00 today. Bloomberg consensus is for the trade deficit to widen to -ZAR3.1 billion in May from -ZAR2.5 billion in April. Standard Bank expects a narrower trade deficit at -ZAR0.5 billion. While base effects will have been positive for vehicle exports, which fell 18%m/m in May 2014, commodity prices remain a drag: the price of iron ore was down 44%y/y in May, gold -7.50% y/y, platinum -21% y/y and coal -19%y/y. We expect negative base effects with respect to commodity prices will only fade in Q4:15.

Markets

The rand weakened further on Monday, closing at 12.24, compared to Friday’s close of 12.20. The rand’s depreciation against the greenback occurred despite dollar weakness against some of the major currencies; the dollar posted losses against the yen (-1.1%) and the euro (0.6%), but gained marginally against the pound. The rand lost ground against all of the major crosses; the yen (-1.3%), the euro (0.9%) and the pound (0.3%). The rand put in the second-worst performance amongst the commodity currencies we monitor for purposes of this report, ahead only of the CAD, and put in the worst performance amongst the EM currencies. The rand traded between a low of USDZAR12.1966 and a high of USDZAR12.4099.

Commodity prices were mixed on Monday. Copper and gold were up on Monday, by 0.6% and 0.4% respectively. Platinum was down by 0.2% on the day. Brent closed 2.0% lower, at $62.01/bbl. Both the developed world MSCI and the MSCI EM were down on Monday, by 2.2%. The ALSI was down by 1.3% on the day. Non-residents were net buyers of equities (ZAR1.239 billion) on Monday. The EMBI spread widened by 20 bps on Monday, while SA’s 5yr CDS widened by 9 bps. The CBOE VIX Index, a volatility-based proxy for global risk appetite/aversion, increased by 34.5%.

Latest SA publications

SA Macroeconomics: Nersa decides on tariffs today: Greece to dominate EM assets by Kim Silberman and Steffen Kriel (29 June 2015)

SA FIC Weekly: Eskom, Greece in focus; revised wage deal has important policy implications by Walter de Wet and Shireen Darmalingam (29 June 2015)

Credit & Securitisation Weekly: Crunch time by Steffen Kriel and Varushka Singh (26 June 2015)

Credit & Securitisation: Eskom's selective reopener by Steffen Kriel and Kim Silberman (26 June 2015)

SA Macroeconomics: The timing of Eskom's tariff increase will significantly impact CPI and the MPC's decision: We await NERSA's decision on Monday June 29th by Kim Silberman and Steffen Kriel (26 June 2015)

SA Macroeconomics: May PPI rises to 3.6% from 3.0%: Food, beverages and petrol contribute to the acceleration by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (26 June 2015)

SA Macroeconomics: CAD narrows to a better than expected 4.8% of GDP: Trade deficit widens but dividend receipts rise by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (24 June 2015)

SA Macroeconomics: The CAD is anyone’s guess, ours is 4.8% of GDP: Portfolio flows to EMs falter by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (22 June 2015)

SA FIC Weekly: The three risks ever clearer - evolution of the main risks to the SARB’s inflation forecast by Walter de Wet and Shireen Darmalingam (17 June 2015)

Credit & Securitisation Weekly: Medupi update by Steffen Kriel and Varushka Singh (19 June 2015)

SA Macroeconomics: Retail sales surprises to the upside at 3.4% y/y in April: YTD retail outperforms 2014 by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (17 June 2015)

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