ZAR relief despite disappointing trade data

China’s manufacturing PMI for September was released this morning, with the index coming in at 49.8 pts, marginally higher than the 49.7 pts seen in August. The print still signals contraction in China’s manufacturing sector. That said this is the first m/m increase since May this year.
It appears as if markets are relieved about this print with commodities and the rand finding some support this morning.
The rand and other EM currencies are stronger with the rand trading just below 13.80 against the dollar. Ahead of US non-farm payrolls numbers tomorrow we would not be surprised to see a reduction in short EM fx positions.
The marginal improvement in the CDS’ of EM countries is another reflection of slightly improved risk appetite. South Africa’s 5y USD CDS has dropped from 307 bps to 291 bps. We would expect the CDS to trade lower as market sentiment improves and target a level closer to 220 bps.
The SARS trade balance data for August was released yesterday. Bloomberg consensus pencilled in a widening of the deficit to -ZAR3.4 billion in August from -ZAR0.4 billion in July. In the event, the trade deficit widened more-than-expected in August to -ZAR9.9 billion from a revised -ZAR1.1 billion in July.
The Barclays Manufacturing PMI data is due for release today at 11h00. Expectations are for the PMI to have improved, albeit marginally, to 49.0 pts in September from 48.9 pts in July.
Naamsa’s vehicle sales data for September is due for release during the course of the day today. Bloomberg consensus is for vehicle sales to have contracted for the sixth consecutive month in September, falling by -7.5% y/y, from -8.2% y/y in August.

International developments

China’s manufacturing PMI for September was released this morning, with the index coming in at 49.8 pts, marginally higher than the 49.7 pts seen in August. This was also higher than the 49.7 pts expected (according to Bloomberg consensus). The print still signals contraction in China’s manufacturing sector. That said this is the first m/m increase since May this year. As pointed out yesterday, seasonally China’s PMI has always printed higher m/m in September. As a result this print is no exception and in line with the general trend one would expect for this month. In fact, if the print was unchanged or lower m/m, we would have read the print as more bearish.

It appears as if markets are relieved about this print with commodities and the rand finding some support this morning. The bullish tone in the market (from very low expectations) also follows a day of good gains in equity markets yesterday with all major indices in Europe and the US ending up more than 1%. The follow through of this momentum is seen in Asian equities too this morning.

The rand and other EM currencies are stronger since yesterday with the rand trading just below 13.80 against the dollar. With market risk appetite marginally stronger today and ahead of US non-farm payrolls numbers tomorrow we would not be surprised to see a reduction in short EM fx positions. For the rand the 13.50 level would now be a key level of support for the USDZAR.

The marginal improvement in the CDS’ of EM countries is another reflection of slightly improved risk appetite. South Africa’s 5y USD CDS has dropped from 307 bps to 291 bps. We would expect the CDS to trade lower as market sentiment improves and target a level closer to 220 bps. At the same time the US 10-year generic bond yield has moved lower to 2.05%, from 2.16% at the start of the week. A marginally stronger currency, lower EM credit risk and a lower UST yields should aid local bonds.

Yesterday’s ADP employment change data – a precursor to tomorrow’s non-farm payrolls (NFP) data was strong, coming in at 200K for September, up from 190K in August and above the 190K expected. One would expect a strong NFP print to raise the probability that the market assigns to a rate hike in December. Currently that probability is at 41% according to the Fed fund futures.

Today is a national holiday in China, but other Asian markets have responded positively to a good day of trade on Wall Street yesterday, ignoring any negative impact of the data print this morning. Yesterday the S&P closed 1.9% up and the Dow Jones closed 1.5% up. At time of writing, the Japanese Nikkei was up 2.2% and the Hong Kong Hang Seng was flat.

Worth noting - the IMF chief Christine Lagarde warned that global growth has been disappointing and uneven this year while speaking this week leading up to the annual meeting of the IMF in Peru next week. Key concerns include emerging markets, the slowdown in the Chinese economy, falling commodity prices, and Fed lift-off – particularly the timing. The news was not all bad, with Lagarde commenting that the US and UK performance has been “reasonably robust”.

Local developments

The SARS trade balance data for August was released yesterday. Bloomberg consensus pencilled in a widening of the deficit to -ZAR3.4 billion in August from -ZAR0.4 billion in July. In the event, the trade deficit widened more-than-expected in August to -ZAR9.9 billion from a revised -ZAR1.1 billion in July. Exports fell by 5.9% m/m in August to R87.6312 billion from ZAR93.084 billion in July. Exports of mineral products declined by 20% m/m (-ZAR4.205 billion) while base metals also declined by 20% m/m (-ZAR2.464 billion) in August. Exports of wood and articles thereof, precious metals and stones and vehicles and transport equipment increased in August.

Imports grew by 0.6% m/m in August to ZAR97.578 billion from ZAR94.198 billion in July and were driven by vehicles and transport equipment (22% m/m and ZAR2.027 billion), mineral products (12% m/m and ZAR1.758 billion) and chemical products (12% m/m and ZAR1.248 billion). Imports of base metals and equipment components fell in August.

YTD the trade balance deficit is almost half the deficit seen last year up to August. Yesterday’s trade balance has brought the cumulative YTD trade balance to -ZAR34.98 billion compared to a cumulative deficit of -ZAR72.03 billion. The trade deficit is still rand negative, but less so than the deficit seen in 2014.

The Barclays Manufacturing PMI data is due for release today at 11h00. Expectations are for the PMI to have improved, albeit marginally, to 49.0 pts in September from 48.9 pts in July. The PMI has been below the benchmark 50 line for four months so far this year. The BER’s measure of consumer confidence is also due for release today. Consumer confidence is expected to have improved, according to Bloomberg consensus expectations, albeit still remaining in negative territory. The Q3:15 consumer confidence data is expected to have improved to -12 pts, from -15 pts in Q2:15.

Naamsa’s vehicle sales data for September is due for release during the course of the day today. Bloomberg consensus is for vehicle sales to have contracted for the sixth consecutive month in September, falling by -7.5% y/y, from -8.2% y/y in August.

Markets

The rand strengthened further on Wednesday, closing at 13.85, compared to Tuesday’s close of 13.98. The rand’s appreciation against the greenback occurred despite dollar strength against all of the major currencies; the dollar posted gains against the euro (-0.6%), the pound (-0.2%) and the yen (0.1%). The rand strengthened against all of the major crosses; the rand gained ground against the euro (-1.5%), the pound (-1.1%) and the yen (1.0%). The rand put in the best performance amongst the commodity currencies we monitor, and put in the second-best performance amongst EM currencies, only behind the BRL. The rand traded between a low of USDZAR13.7965 and a high of USDZAR13.9879.

Commodity prices were mixed on Wednesday. Platinum and gold were down by 1.4% and 1.1% respectively, while copper was up by 3.8% on the day. Brent closed the day 0.3% higher, at $48.37/bbl. Both the developed world MSCI and the MSCI EM were up on the day, both by 2.0%. The ALSI was up by 1.4% on the day. Non-residents were net sellers of equities on the day. The EMBI spread narrowed on Wednesday by 17 bps, and SA’s 5yr CDS narrowed by 14 bps. The CBOE VIX Index, a volatility-based proxy for global risk appetite/aversion, decreased by 8.7%.

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