Standard Bank Research Team
Standard Bank
Equities and EM currencies rally as the ECB announces QE. The rand strengthened to 11.3600 before giving back some ground. The currency is trading just above 11.4000 this morning.
The ECB tied asset purchases to inflation outcomes, stating that it would continue purchases “until we see a sustained adjustment in the path of inflation”, and thus leaving the possibility that the programme could be extended beyond September next year. We believe that this is a powerful statement.
Our mid-point for the rand in Q1:15 remains at 11.50.
Following the ECB comments, the R186 moving below 7.30%. We expect today to be slightly calmer as markets absorb the impact of the ECB’s plan. Tactically, we remain long SAGBs.
Today’s ILB auction sees NT aiming to issue R800m across the I2025, I2046 and I2050 bonds.
China’s flash PMI for January was released this morning. The index is still below 50, at 49.8 — signalling a contraction in the manufacturing sector.
Technicals for the rand suggest that support levels, from where the rand opened this morning, are at 11.3900, 11.3500 and 11.3200. Resistance levels are at 11.5200, 11.5800 and 11.6700.
International developments
After much anticipation, the ECB yesterday announced a quantitative easing programme. The size of the programme was somewhat larger than most had expected, with the ECB pledging asset purchases of EUR60 billion per month from this March to September next year — implying an increase in the Bank’s balance sheet of EUR1.1 billion. This is largely in line with previous rhetoric which indicated that the ECB would like to expand its balance sheet back to 2012 levels. Capital Economics also points out that the programme announced yesterday includes existing bond purchases, which amount to about EUR10 billion per month, which means EUR50 billion in additional purchases. Purchases will be confined to investment-grade sovereign binds and the debt of “agencies and European institutions”. The Bank tied asset purchases to inflation outcomes, stating that it would continue purchases “until we see a sustained adjustment in the path of inflation” and thus leaving the possibility that the programme could be extended beyond September next year. In light of market reaction, it would appear as though participants were not disappointed. The euro weakened to around 1.13 against the dollar and risky assets, including the rand, also received a shot in the arm – the announcement helped push the rand temporarily below the 11.40 mark against the dollar.
Sticking with the Eurozone, with the ECB now out of the way, all eyes will now turn to Sunday’s elections in Greece. Opinion polls give opposition Syriza a modest lead of around 3%. The party with the most votes also gets an extra 50 seats in the 300-seat parliament but this still seems unlikely to help Syriza over the 151-seat line needed for a majority. Most other parties besides the incumbent New Democracy score pretty poorly in the polls and need to register a 3% score in the election to gain access to parliament. With many parties close to this threshold it’s hard to say who – if at all – might be in parliament and hence possibly align with Syriza. The relatively new To Potami seems the most likely. Steve Barrow’s (our G10 FIC Strategist) view is that Syriza will win and, while it is likely to fall short of a majority, he does think it will be able to form a coalition in subsequent days or weeks.
China’s HSBC Flash PMI for January was released this morning. The index came in at 49.8, marginally higher than the 49.6 seen in December. The flash index indicates that the manufacturing sector most likely still contracted in January. With the manufacturing sector struggling, industrial commodities remain under pressure, with copper trading again below USD5,700 this morning. While ECB monetary policy has given EM currencies a boost, we remain conscious of the fact that the ZAR remains a commodity currency, and struggling commodity prices should continue to be a drag on the rand.
Markets
The rand strengthened further on Thursday, closing at USDZAR11.40, compared with Wednesday’s close of USDZAR11.51. Rand appreciation occurred despite dollar strength against all of the major crosses; the dollar strengthened most against the euro (2.1%) and the pound (0.9%). The rand strengthened against most of the major crosses, with the big increases seen against the euro (3.1%), the pound (1.9%), the yen (1.4%), and the dollar (1.0%). The rand put in the best performance amongst the commodity currencies we monitor and the fourth-best performance amongst the EM currencies, behind the RUB, TRY, and the BRL. The rand traded between a low of USDZAR11.3625 and a high of USDZAR11.5592 intraday.
Commodities were mixed on the day. Gold and platinum were up on the day, increasing by 0.7% and 1.0% respectively, while copper decreased by 1.8%. Brent was down by 1.0% to close at $48.52/bbl. The developed market MSCI was up by 1.0% on Thursday, while the MSCI EM was up by 0.8% on the day. The ALSI increased by 0.6% on the day. Non-residents were net seller of equities on Thursday (-ZAR59 million). The EMBI spread narrowed by 3 bps, while SA’s 5yr CDS spread narrowed by 9 bps. The CBOE VIX index, a volatility-based proxy for global risk appetite/aversion, fell by 13% yesterday.
Turnover was R22.2bn in nominal SAGBs, less than R500m in ILBs. 40% of turnover came from the R186, 13% from the R213 and 16% from Wednesday’s auction bonds (R2030, R2032, R214). Non-comp take-up was R401m in the R2030 (50%), R400m in the R2032 (44%) and R222m in the R214 (34%). Offshore investors were net sellers of a marginal -R299m of SAGBs, with selling dominated by the R204 (-R1.0bn), R2023 (-R332m) and R214 (-R148m). Offset buying was in the R186 (+R856m), R203 (+R245m) and R158 (+R141m).
Local bonds saw a post-ECB rally into end of day, after spending the earlier part of the day selling off. The curve steepened as front-end bonds rallied by 6.0 bps and back-end bonds by 4.0 – 4.5 bps. The benchmark R186 moved 5.0 bps stronger. FRAs however saw extremely mixed moves, but of small 1 – 2 bp magnitudes. US Treasuries flattened very slightly with 2yr and 5yr UST moving 1.0 and 1.5 bps higher and 10yr and 30 yr USTs moving 0.9 and 2.3 bps stronger. However, 10yr USTs are still trading below 2.0%, at 1.87% this morning.
EM local currency sovereign debt rallied yesterday, by 8.0 and 4.0 bps for 5yr and 10yr tenors respectively. Russia led the moves stronger in both maturities, rallying by 33.4 and 30.3 bps respectively. South Africa slightly underperformed the 5yr EM average, but outperformed the 10yr EM average.
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