Moody's revises Turkey's outlook to negative

FX

Moody’s has revised the outlook on Turkey’s Baa3 foreign currency long-term government rating to negative from stable. The agency simultaneously affirmed Turkey’s existing sovereign ratings at the current levels. In its statement, Moody’s listed two drivers for revising the outlook lower, and two drivers for affirming the ratings. In the context of the outlook revision to negative, Moody’s noted that “increased pressure on the country’s external financing position driven by heightened political uncertainty and lower global liquidity” was the first factor. The “slowing near-term outlook for GDP growth” and uncertainty regarding Turkey’s medium-term growth prospects, was the second reason, which the agency noted as “adversely affecting foreign and domestic investor confidence”. The first reason for the ratings affirmation was “the government’s strong fiscal metrics, which have seen a substantial decline in debt-to-GDP in recent years, a declining share of debt denominated in foreign currency, and a lengthening of the debt’s maturity structure”. The second was based on the country’s “economic strengths”, which sees Turkey outperform relative to its ratings peers in categories such as “wealth and economic diversification”. Turkey’s foreign currency rating by Moody’s sits on par with that of Fitch (BBB-), and one notch above S&P’s rating (BB+). Turkey is rated two notches below SA on a foreign currency basis by Moody’s and S&P, and one notch lower based on Fitch’s assessment. Moody’s rates South Africa Baa1 on a long-term foreign currency basis.

Inflation numbers for China released overnight confirm the view that, for now, price pressures remain relatively benign, with little threat of provoking any monetary policy action from the PBoC. As widely expected (Bloomberg consensus), consumer price inflation rebounded to 2.4% y/y in March from 2.0% y/y the previous month. The major impetus for the rebound in the headline number was a seasonal pick-up in food inflation, which according to Capital Economics was entirely owing to Lunar New Year distortions to y/y changes and should therefore prove transitory. Producer prices fell 2.3% y/y, a slightly harder fall than the 2.2% y/y expected. Capital Economics stresses that this should not raise any deflationary alarm bells, as it largely reflects global commodity prices rather than domestic demand and supply outcomes. The more important data with regard to PBoC action could be money supply and loan growth data, which should be published in the coming days (no specific date is provided by Bloomberg). This should give some insight into the PBoC’s efforts at clamping down on excessive credit expansion. Uncertainty surrounding the extent to which tightening credit conditions might negatively impact China’s growth prospects has many market participants particularly sensitive to money supply and credit numbers.

Stronger US jobless claims data yesterday may have dampened some of the appetite for risk which had been fuelled by the previous day’s release of FOMC minutes. Jobless claims for the week ended 5 April fell to 300k from an upwardly revised 332k (326k previously) in the preceding week. This was well below the anticipated 320k (Bloomberg consensus). Our G10 Strategist Steve Barrow points out that should a similar number be seen for next week’s jobless claims data, it could stoke speculation that April payrolls data could rebound strongly, since next week is the survey week for payrolls. Continuing claims, for the week ended 29 March, fell to 2,776k from 2,838k (revised marginally higher from 2,836k). This too was a stronger improvement than expected (Bloomberg consensus: 2,835k).

As widely anticipated the BoE made no change to policy yesterday. Given the strength of the UK recovery, the BoE’s next move is likely tightening. However, such a move is not expected until next year. Steve Barrow pins the first hike sometime in Q2:15.

Mining production contracted 4.8% y/y (down 7.0% m/m s.a.) in February, a marked changed from the 3.7% y/y growth (revised from 3.1%y/y) recorded in January. This contraction was considerably greater than anticipated - Bloomberg consensus had the contraction pegged at 0.5% y/y (down 3.4% m/m s.a.). PGM production emerged as the key drag to mining output in February, subtracting a notable 7.6ppts from overall production on the back of a 35.8%y/y contraction. This was largely anticipated on the back of the ongoing strike at miners Anglo Platinum, Impala Platinum and Lonmin. With the strike still ongoing, PGM production will likely remain a drag on overall mining production, and consequently exports, over the next few months. Manufacturing output growth slowed to 1.4% y/y (a 1.9% m/m s.a. contraction) in February, undershooting Bloomberg consensus estimates for a 4.0%y/y (0.5%m/m s.a.) improvement, and weaker than the improvement in January of 2.2% y/y (downwardly revised from 2.5%y/y). Despite generally favourable base effects, motor vehicle manufacturing registered its first y/y contraction since strike-related stoppages in H2:13 of 1.1% (down a 3.8%m/m s.a.) in February, subtracting 0.1ppts from overall manufacturing. This is likely related to the suspended production at Mercedes Benz operations due to retooling a new vehicle line, set to commence in Q2:14. The weakness in mining and manufacturing numbers should be read as rand negative, via what it signals regarding the current account and/or their implications for domestic interest rates.

The rand weakened against the dollar yesterday after four consecutive days of strength, closing at USDZAR10.47 compared with Wednesday’s close of USDZAR10.38. This occurred despite a mixed to weaker performance from the dollar against the major crosses and a largely weak performance across commodity and EM currencies we track for purposes of this report. The dollar weakened against the euro and the yen, while strengthening slightly against the pound. The rand weakened against all of the major crosses, with the biggest move seen against the yen (-1.3%). Three of the five commodity currencies we monitor – namely the ZAR, the CAD and the NZD – weakened on the day; while the remaining two currencies (the NOK and the AUD) strengthened slightly. All but three of the EM currencies we track weakened on the day; the exceptions were the RUB, the HUF and the INR. The rand was the worst-performing commodity currency and second-worst-performing EM currency (beating only the BRL). The rand traded between a low of USDZAR10.3621 and a high of USDZAR10.4750. Support from where the rand opened this morning sits at 10.4000, 10.3500 and 10.2500. Resistance levels sit at 10.5000, 10.5500, 10.6800 and 10.7400.

Turning to commodity prices, platinum, copper and gold rose by 1.1%, 0.6% and 0.5% respectively. Brent meanwhile fell by 0.5%. The ALSI rose by 0.5% and the EM MSCI by 0.7%. The EMBI spread compressed by 1 bp and the SA’s five-year CDS spread compressed by 3 bps. The CBOE VIX index, a volatility proxy for global risk appetite/aversion, rose by 15.0%.

Non-residents were aggressive net buyers of local equities (ZAR1 906 million) and were moderate net buyers of local bonds (ZAR725 million) on the day. Buying of bonds was seen in the 12+ (ZAR943 million), 7-12 (ZAR86 million) and 3-7 (ZAR23 million) year buckets. Selling of bonds was meanwhile seen in the 1-3 (-ZAR328 million) year segment. Bond yields fell by between 8 bps (R203) and 10 bps (R186). The 3-mionth Jibar rate rose by 2 bps from 5.73% to 5.75%. The 3x6, the 6x9 and 12x15 FRAs fell by 1 bp, 4 bps and 6 bps respectively.

FI

At today’s ILB auction, NT is planning to raise up to ZAR800m in the I2025, I2038 and I2050. The government ILB auction of 4 April saw decent demand for the I2025, I2038 and I2050, and priced strongly compared to the market. Total bids were recorded at ZAR1.68bn, for an auction bid/cover ratio of 2.1x. The I2025 cleared at a yield of 1.70%, compared with the previous day’s MTM yield of 1.72%. The I2038 cleared at 2.06% (MTM: 2.09%) and the I2050 cleared at 2.18% (MTM: 2.19%).

Local government bond yields fell by between 7.50 bps and 10.00 bps across the curve yesterday. This was on the back of the release of the Fed’s FOMC meeting minutes on Wednesday evening, which saw SAGBs follow the rand and US Treasuries stronger through the day. However, the rand depreciated after the local bond trading session had ended, with China data slightly weaker earlier in the day and Turkey’s sovereign rating outlook being revised to negative by Moody’s. The rand closed at USDZAR10.47 yesterday, from USZAR10.38 the day before. This morning, the currency is trading in line with yesterday’s closing level and bond yields have opened slightly weaker.

The spread on the R186/R157 flattened by 3.00 bps yesterday, to 160.50 bps, while the R213/R186 spread widened by 2.50 bps to 45 bps, and the R2048/R186 spread widened by 1.50 bps to 75.50 bps. SA’s 5-year CDS spread improved yesterday, to 183.21 bps, from 186.17 bps the day before. US Treasury yields continued to fall yesterday, continuing their strengthening momentum. The 10-year UST ended the trading day at 2.65%, from a yield of 2.69% on Wednesday, and the 5-year yield fell to 1.59% from 1.62%.

Total SAGB turnover improved to ZAR28.12bn yesterday, from Wednesday’s ZAR19.59bn; ZAR26.97bn of this turnover was due to nominal SAGBs. The R186 recorded a significant ZAR12.40bn in turnover on the day, and the R213 recorded turnover of ZAR3.98bn. Government ILBs accounted for ZAR1.15bn of yesterday’s volumes.

Non-residents purchased +ZAR725m of nominal SAGBs yesterday. The 12+ year maturity bucket recorded foreign buying of +ZAR934m, with notable inflows recorded in the R214 (+ZAR281m), R2030 (+ZAR248m), R186 (+ZAR231m) and R213 (+ZAR171m). In the 3-7 year bucket, -ZAR509m was sold in the R204, while purchases of +ZAR297m and +ZAR155m were recorded in the R204 and R207 respectively. Net selling of -ZAR328m was recorded in the R157 on the day. However, total foreign purchases in the entire market were recorded as net sold for over -ZAR600m, after the JSE recorded offshore investors as net sellers of over -ZAR1bn of Telkom’s TL20 corporate bond.

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