ECB: All teed up to ease

FX

The ECB is expected to cut policy rates today and perhaps take another measure, or measures, to ease liquidity. On rates, the market (Bloomberg consensus) anticipates that all three will be cut: the lending rate, the refi rate and the deposit rate. On the refi rate, which currently stands at 0.25%, the market consensus is for a 15 bps cut to 0.10%. However, Steve Barrow (our G10 FIC Strategist) points out that the majority in favour of this move is not overwhelming. The Bloomberg survey of 60 analysts sees 34 calling for a 15 bps cut and 21 for 10 bps. The – more interesting – deposit rate (which currently stands at zero) is also subject to differing views. Here 32 of the 50 analysts see a 10 bps cut with 12 anticipating a 15 bps reduction. Steve’s view is that the ECB will cut all the rates by 15 bps. He also thinks that the ECB may need to cut by at least 15 bps to avoid disappointing the market. Steve warns that the rate decision should not be judged in isolation, although it undoubtedly will be for a time as the rate decision announcement will likely precede any announcement of any additional measures, since the latter will only be discussed at the press conference which starts some 45 minutes after the rate announcement. There have been a number of options that have been put forward for what else the ECB might do. These include extending maximum allotment repos, new long-term repos, a sort of funding-for-lending scheme, non-sterilisation of earlier bond purchases or new asset purchases under some sort of quantitative easing plan. There might even be other options that the market has not really thought of. Steve favours some sort of funding-for-lending scheme whereby the ECB grants banks access to low cost funds in return for a commitment from the banks to on-lend the cash to firms and individuals. An ECB that eases could to some extent soften the blow of Fed policy normalisation to emerging market currencies, particularly for those countries with large current account deficits and consequently a large external financing requirement like South Africa. Monetary policy divergence among the major central banks also reduces the risk that the global recovery will be derailed, which is (trade-weighted) rand positive.

The BoE will also make its policy announcement today, before the ECB. However, the BoE is not expected to make any change to policy this week. Given the strength of the UK recovery, the BoE’s next move is likely tightening, although such a move is not expected until Q1:15, according to Steve.

Data releases for the Eurozone yesterday all added to the case for further easing. The second estimate of Eurozone Q1:14 GDP left the quarterly growth rate in output unrevised at a paltry 0.2%. PPI numbers maintained the spectre of deflation, despite the rise from -1.6% y/y in March to -1.2% y/y in April, as this increase seemed mostly to do with a rise in energy prices. The final reading on the Eurozone composite PMI for May indicated that the economic recovery has failed to gain much traction during Q2:14 so far. The composite index was revised down from 53.9 to 53.5, falling from April’s 54.0.

The rand weakened further against the dollar yesterday for the fourth consecutive day, closing at USDZAR10.77, compared with Tuesday’s close of USDZAR10.76. This occurred into a strong performance from the dollar against the major crosses and alongside a weaker performance from almost all the commodity currencies we monitor for the purposes of this report. Rand depreciation occurred despite a mostly stronger performance from the EM currencies we track for the purposes of this report. The dollar strengthened against the euro, the pound and the yen, with the biggest moves seen against both the euro and the yen (±0.2%). The rand weakened against the dollar and the pound, while strengthening against the euro and the yen. All but one of the commodity currencies we monitor depreciated on the day, the exception being the AUD. Five of the nine EM currencies we track strengthened on the day. The rand took up the middle position in the commodity currencies category and was the fourth-worst-performing currency in the EM currencies category (beating only the IDR, the THB and the HUF). The rand traded between a low of USDZAR10.7159 and a high of USDZAR10.8045. Support from where the rand opened this morning sits at 10.7000, 10.5800, 10.5200, 10.4800 and 10.4400. Resistance levels sit at 10.8200, 10.9400, 10.9850 and 11.1150.

Turning to commodity prices, copper, Brent and gold fell by 1.2%, 0.4% and 0.1%, respectively. Platinum meanwhile rose by 0.7%. The ALSI rose by 0.03%, while the EM MSCI rose by 0.5%. The EMBI spread widened by 2 bps and the SA’s five-year CDS spread widened by 6 bps. The CBOE VIX index, a volatility proxy for global risk appetite/aversion, rose by 1.8%.

Non-residents were mild net sellers of local equities (-ZAR427 million) and were net moderate buyers of local bonds (-ZAR776 million). Selling of bonds was seen in the 12+ (-ZAR803 million), 7-12 (-ZAR125 million) and 1-3 (-ZAR85 million) year buckets. Buying was meanwhile seen in the 3-7 (ZAR237 million) year segment. Bond yields rose by between 1 bp (R208 and R186) and 4 bps (R214). The 3x6, 6x9 and 12x15 FRAs rose by 4 bps, 1 bp and 3 bps respectively.

In local labour news, Joseph Mathunjwa, AMCU leader, told Reuters yesterday, "[t]he meeting went well. The talks are ongoing." Ngoako Ramatlhodi, newly appointed mining minister, and his task team will assist with finding a resolution to the strike (that began on 23 January) and have kicked off the process by having met with AMCU leaders on Tuesday. The minister and his task team also met management of strike-hit platinum producers Amplats, Implats and Lonmin yesterday. The union is demanding R12,500 a month as basic minimum wage to be achieved in four years. The companies have offered pay increases of up to 10%, which would raise the overall minimum pay package to R12,500 by July 2017, although this includes cash allowances for necessities such as housing. A resolution of the strike should be viewed as rand positive in that it might serve to ease anxieties regarding current account compression, as well perhaps to some extent allay rising concerns over the country’s growth prospects.

In other local news, the wait for news about an Eskom’s proposed interim electricity tariff increase continues after Nersa (National Energy Regulator of South Africa) has required “more information” from the electricity provider, according to Nersa spokesperson Charles Hlabela. The regulator’s decision regarding an increase over and above the 8% per year granted for the period 2013 - 2018 was initially expected by the end of February, but that was later adjusted to the end of May. If an increase should be granted, it is expected to only come into effect on 1 April 2015. It should be noted that Eskom’s sales (thus revenue) is deteriorating, while expenditure has increased sharply - one massive number with regard to expenditure is the sharp increase in the use of the open-cycle gas turbines (OCGTs). These turbines were designed to augment power supply for short periods of peak demand, but are currently being used much more than anticipated. Brian Dames, former Eskom CEO had said that electricity generation by these plants comes at a cost 16 to 18 times more than that of coal-fired power stations, depending on the diesel price”. Andrew Etzinger, Eskom spokesperson, indicated that Nersa and Eskom are still liasing with each other and pointed out that it is vital for Eskom to have certainty about the outcome of the Nersa process, as it informs financial planning.

FI

All eyes on ECB today. As our G10 analyst Steve Barrow has been stating over the past few days, the ECB has convinced the markets that rates will be taken lower today. The market reaction to this move may be slightly muted, but the negative reaction to any disappointment is likely to be far bigger. We expect the markets to be fairly quiet leading up to the ECB decision.

Yesterday’s turnover was recorded at ZAR21.0bn in nominal SAGBs and ZAR420m in inflation-linked SAGBs. 70% of the turnover was due to bonds from the R186 onwards, with the benchmark R186 accounting for 32%of the market turnover. Compared to the previous day’s moves, yesterday saw the curve shift only slightly higher, led by the wings. The front-end R186/R157 spread bear flattened by 2.5 bps to 167 bps, while the back-end R2048/R186 bear-steepened by 4 bps to 86 bps. Offshore selling totalled -ZAR776m, with -ZAR124.5m sold in the 7-12 year bucket and -ZAR802.9m sold in the 12+ year bucket. Offshore investors bought the R203 for +ZAR143.5m, the R208 for +ZAR104.8m and the R213 for +ZAR132.7m. However, these purchases were overwhelmed by selling in the R2023 (-ZAR124.5m), the R186 (-ZAR330.9m), R209 (-ZAR238.5m) and R214 (-ZAR183.8m).

The rand was far more stable yesterday, weakening by only 1c against the US dollar, but has weakened by over 30c on the week. In response, FRAs weakened slightly yesterday, but are still pricing in around 50 bps over the next four months, 75 bps over six months and 130 bps over nine months.

National Treasury announced their auction stock for next week, offering ZAR1.1bn of the R2030, ZAR350m of the R2032 and ZAR900m of the R2048. This will be the first issue of the R2032. Our formal pricing advisory, published yesterday, noted that while the R2032 should price at a fair value to the curve of R213 + 2.7 bps, it is more likely to price closer to R213 + 18 to 23 bps.

The UST steepened slightly yesterday, with small moves across the curve. The two and five year USTs tightened by slightly under 1 bp, while the 10 and 30 year USTs moved higher by less than 1 bp. The 10-year treasury note has now widened by almost 16 bps over the past week and is trading at 2.59%. The average EM local currency curve steepened yesterday, with the average move in five year bonds -0.34 bps and 10-year moves averaging +1.78 bps. South African debt saw the second biggest moves in the five year debt space, behind only Turkey, but was in the middle of the pack in the 10-year space. Russian and China local currency debt were the strongest movers yesterday, with Turkey and Hungary being amongst the weakest. However, over the past week, South Africa and Mexico have been the only EM countries that have seen significant weakness.

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