Nerves ease as China equities stabilise

• Markets have settled after the drop of more than 8% in the Shanghai Composite Index yesterday. After opening almost 4% lower this morning, the Index has clawed back most of these early morning losses, and it is down around 1.4% on the day at time of writing.

• The main concern for South Africa would be what a decline in equities in China implies for growth in China and, by implication, commodity demand. The rand is a commodity currency, and any concerns over commodity prices will be a drag on it.

• Brent crude oil is testing $53/bbl. Besides oil, most commodities have stabilized too, albeit at still low levels.

• The slightly improved risk appetite may support the rand after the sell-off in the currency since Thursday last week. The rand has tried to break above 12.70 twice since Friday but failed.

• Ahead of tomorrow’s FOMC rates announcement, we expect markets to consolidate.

• The unions in the gold sector concluded a deal with the Village Main Reef yesterday. The National Union of Mineworkers (NUM) signed the deal under the auspices of the Chamber of Mines, while the Association of Mineworkers and Construction Union (Amcu) did not sign the deal.

• The rand put in a mixed performance amongst the commodity currencies we monitor for purposes of this report, and put in the third-best performance amongst the EM currencies, behind only the HUF and THB.

• USDZAR resistance is at 12.6300 and 12.7000. Support is at 12.5500, 12.4050.

International developments

Markets have settled after the drop of more than 8% in the Shanghai Composite Index yesterday. After opening almost 4% lower this morning, the Index has clawed back most of these early morning losses, and it is down around 1.4% on the day at time of writing. Although major equity indices in Europe and the US mostly closed down yesterday, the performance is mixed in Asia this morning, with Australia’s ASX trading flat on the day and the Nikkei in Japan marginally higher.

Although global equities are being dragged down by concerns over what is happening in China, we note that the main concern for South Africa would be what a decline in equities in China implies for growth in China and, by implication, commodity demand. The rand is a commodity currency, and any concerns over commodity prices will be a drag on it.

Brent crude oil is testing $53/bbl. Apart from oil, most commodities have stabilized too, albeit at still low levels. Gold has crept towards the $1,000 level, and platinum is steady around $980.

The slightly improved risk appetite may provide support for the rand after the sell-off since Thursday last week. The rand has tried to break above 12.70 twice since Friday but failed. Ahead of tomorrow’s FOMC rates announcement, we expect markets to consolidate.

As of Friday last week, the Fed fund futures were pricing only a small chance of a hike at this week’s meeting, with a steadily rising chance of a hike in September and December. Over the next 12 months, Fed fund futures are pricing two 25 bps hikes. However, our interest lies in how the Fed’s language might change around the pace of hikes after the initial 25 bps hike. In the past few months, they have indicated that the Fed fund rate would rise at a very moderate pace and that policy in the US would remain accommodative. We still expect a rate hike in September. USTs are steady, which is aiding bond yields despite the weaker rand.

Data-wise, it is a quiet day on the international front. As mentioned, ahead of the Fed and the South Africa’s trade balance on Friday (where we look for a R4.4bn surplus), we expect a steady rand.

USDZAR resistance is at 12.6300 and 12.7000. Support is at 12.5500, 12.4050.

Local developments

The unions in the gold sector concluded a deal with the Village Main Reef yesterday. The National Union of Mineworkers (NUM) signed the deal under the auspices of the Chamber of Mines, while the Association of Mineworkers and Construction Union (Amcu) did not sign the deal. The deal included a R1,000 increase (across the board) for underground workers, while surface workers in category 4-8 bargaining unit are to receive an R800 increase. While this deal was signed yesterday, it seems that it could be superseded by talks at the central level when this round of talks is concluded on Thursday.

Markets

The rand strengthened on Monday, closing at 12.62, compared to Friday’s close of 12.66. The rand’s appreciation against the greenback occurred in line with dollar strength against some of the major currencies; the dollar posted losses against the euro (0.9%), the yen (-0.5%) and the pound (0.3%). The rand lost ground against all of the major crosses; the euro (0.9%), the yen (-0.4%) and the pound (0.3%). The rand put in a mixed performance amongst the commodity currencies we monitor for purposes of this report, and put in the third-best performance amongst the EM currencies, behind only the HUF and THB. The rand traded between a low of USDZAR12.5802 and a high of USDZAR12.6919.

Commodity prices were down on Monday. Copper and platinum and gold were down on Monday, by 1.4% and 0.6% respectively. Gold was down by 0.5% on the day. Brent closed the day 2.1% lower, at $53.47/bbl. Both the developed world MSCI and MSCI EM were down further on Monday, by 0.7% and 2.0% respectively. The ALSI was down by 0.3% on the day. Non-residents were net sellers (-ZAR1.275 billion) of equities on Monday. The EMBI spread widened by 11 bps on Monday, and SA’s 5yr CDS widened by 8 bps. The CBOE VIX Index, a volatility-based proxy for global risk appetite/aversion, increased by 13.5%.

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