Standard Bank Research Team
Standard Bank
FX
On the international front, crude oil remains under pressure, with Brent crude oil now at USD76.60. Indications are that OPEC members have reached consensus in their decision about production, although that decision will only be made public today. However, from the behaviour of the crude oil market, and the fact that Saudi Arabia (the dominant OPEC member) has been reluctant to cut production, it seems that the current oversupply of crude may well linger for longer. Previously, OPEC’s Secretary General has alluded to a 0.5 mbpd cut in the quota, which would be slightly more than the 0.3 mbpd fall in global demand for OPEC crude oil the cartel currently envisages in 2015. OPEC supply has been increasing more recently, rising from 30.1 mbpd in July to 31.0 mbbd at last count in October (according to data compiled by Bloomberg). OPEC’s own latest estimates of supply tell a slightly different story – a more modest increase in supply between July and September (from 30.1 mbpd in July to 30.5 mbpd) and a decline to 30.3 mbpd in October. Notwithstanding these differences, it would appear that OPEC is producing more than its prescribed quota already. Consequently, better adherence to existing quotas (without actually changing them) would already improve the supply/demand balance in the global crude oil market.
It is worth noting that with oil under pressure, inflationary pressures are subsiding, not only in SA but also elsewhere. The US 2-year breakeven inflation – as implied by the bond market – has fallen from 1.8% in July (when Brent crude was trading at USD110/bbl) to 0.7% yesterday. For South Africa, we currently pin our CPI forecast for 2015 at 5.1% y/y; this is based on expectations of an oil price that rebounds to around USD90/bbl next year. Given that the SARB at last week’s MPC meeting referred to oil prices remaining at “current levels” (at that stage around USD80/bbl) as a downside risk to its inflation outlook, it is reasonable to infer that the bank used a higher oil price assumption in arriving at their current forecasts. This means that should OPEC decide to cut its quota, or at least credibly ensure greater compliance with the existing quota, an accompanying increase in oil prices would not necessarily translate to a change in the SARB’s inflation outlook. Without knowing the bank’s oil price assumption, it is difficult to determine the exact threshold oil price at which the bank might have to raise its inflation forecasts.
Stats SA releases PPI data for October later today. Bloomberg consensus expectations are for the print to have moderated in October, to 6.6% y/y from 6.9% y/y in September. PPI has been on a steadily moderating path since reaching a peak of 8.8% y/y in April this year.
US markets will be closed today for the Thanksgiving holiday. Steve Barrow (our G10 Strategist) notes that this holiday is usually associated with incredibly dull global trading conditions, and aside from the oil market, doubts that it will be any different this time despite a fair amount of Eurozone data releases and policymaker speeches. Eurozone M3 data is expected to show a continued inching ahead, at least in y/y terms, although this says more about past weakness than current strength. Private sector loan growth is still negative in y/y terms, even if it is seen improving to -1.0% in October from -1.2% in September. The ECB conducted its first Targeted Long Term Repo (TLTRO) in September, designed to ply banks with cash in exchange for stronger bank lending to firms and individuals. But Steve thinks, given time lags and the small size of the uptake (only EUR82.6 billion), that it won’t have made much of an impact on today’s monetary data. Perhaps in the future it will start to have a more significant impact.
On the German CPI data, we will see the various states release their November data through the morning before the preliminary German CPI is released. The consensus is for a flat number in monthly terms on both the national basis and the harmonised basis (which is used for the aggregate Eurozone calculation). A flat monthly figure would reduce national inflation to 0.6% y/y from 0.8% y/y last time, with the harmonised measure also falling to 0.7% y/y. Steve points out that this would be consistent with the forecast for the flash Eurozone CPI figure tomorrow, which is seen dropping to 0.3% y/y according to the Bloomberg consensus.
There are also some policymaker speeches in Europe today. BoE Governor Carney speaks about the Bank’s recent Financial Stability Report. ECB President Draghi speaks in Finland and his deputy, Constancio, discusses the ECB’s own financial stability report a little earlier in the day. Steve notes that one of issues that’s taxing the mind of central bankers and regulators is the “froth” that is apparent in some financial markets such as corporate credit. He thinks we may find Carney discusses this issue a bit more than Constancio on the basis that the latter might spend more time discussing the aftermath of the ECB’s AQR and stress tests. Either way, given the US Thanksgiving holiday, we would be surprised if any of the speakers causes a sharp movement in market prices today.
The rand strengthened against the US dollar on Wednesday, closing at USDZAR10.96, compared with Tuesday’s close of USDZAR10.97. Rand appreciation against the dollar, albeit mild, occurred in line with dollar weakness against all of the major crosses, with the biggest move seen against the pound (0.5%). Aside from the dollar, the rand weakened against most of the major crosses, with the biggest move seen against the pound (0.5%). The rand put in the second-worst performance amongst the commodity currencies, ahead of only the NOK. In the EM category, the rand was the third-best, behind the BRL and TRY. The rand traded between a low of USDZAR10.9436 and a high of USDZAR11.0189 intraday. Support from where the rand opened this morning sits at 10.9000, 10.8550, 10.8000 and 10.7500. Resistance levels sit at 11.1000, 11.1650, 11.2450 and 11.3100.
Commodities were mixed on the day. Platinum increased by 0.3%, while gold was down by 0.3%. Copper fell by 0.5% on the day. Brent continued its decline and fell 0.7% ahead of OPEC’s supply decision later today. Both the developed market MSCI and MSCI EM were up on Wednesday, rising 0.3%. The ALSI diverged from the general trend in equities, falling by 0.3%. The EMBI spread narrowed by less than 1 bp, while the SA’s 5yr CDS spread widened by less than 1 bp. The CBOE VIX index, a volatility-based proxy for global risk appetite/aversion, fell 1.5%.
Non-residents were net buyers of local equities (ZAR203 million) and net buyers of local bonds (ZAR531 million). Buying of bonds was seen in the 3-7 (ZAR682 million) and 1-3 (ZAR34 million) year segments, while some selling was seen in the 12+ (-ZAR177 million) and 7-12 (-ZAR7 million) year buckets. Bond yields decreased by between 8 bps (R203, R214) and 9 bps (R208, R186). The 6x9 FRA fell by 3 bps, the 6X9 fell by 4 bps, and the 12x15 by 8 bps.
Latest SA publications
SA FX Weekly: SARB: less hawkish, rand more vulnerable by Marc Ground and Shireen Darmalingam (26 November 2014)
SA Fixed Income Weekly: Bond rally into year-end by Asher Lipson (21 November 2014)
Credit & Securitisation Weekly: Issuers return to local DCM by Robyn MacLennan, Steffen Kriel and Varushka Singh (21 November 2014)
Credit & Securitisation Monthly: Moody’s downgrades SA by Robyn MacLennan, Steffen Kriel and Varushka Singh (11 November 2014)
Credit & Securitisation Flash Note: Transnet SOC Ltd by Robyn MacLennan and Steffen Kriel (31 October 2014)
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