Metals and engineering strike close to conclusion?

FX

In local labour news, with regard to the strike in the metals and engineering sector, an agreement by parties, which would end the strike, is on the brink of being reached. Mokgadi Pela, Labour Minister Mildred Oliphant's spokesperson, said yesterday, "[p]arties are very close to an agreement. We are trying to iron out some sticky issues." The labour department held a meeting with the employers yesterday and this was meant to be followed by one with Numsa. Union members in the metal and engineering sector went on strike last week (1 July) in demand of a 15% wage increase and a R1,000 housing allowance in a one-year bargaining agreement.

Once again, the international data calendar is rather sparse. Today’s release of the Job Openings and Labor Turnover (JOLTS) data report for May might garner some interest. The Fed has made it clear that as labour market slack closes, “it will be necessary for the FOMC to form a more nuanced judgment about when the recovery of the labor market will be materially complete”. This means that aside from the unemployment rate and payrolls data, the Fed will be looking at an array of labour market indicators to inform its policy decisions. Fed Chair Yellen has previously mentioned, as among these, indicators of labour market turnover, which are contained in the JOLTS report. Increases in the quits rate seem to have stalled, as it remained at a low 1.8% in April (all the indicators mentioned here are expressed as a percentage of total employment). Yellen has said that a rising quits rate would be taken as a sign of a healthier economy. As she put it, “[w]hen workers are scared they won’t be able to get other jobs they show a reduced willingness to quit their jobs”. Encouragingly, the job openings rate continues to rise – from 2.9% to 3.1% in April. However, the hires rate is still “extremely depressed” (at 3.4%), signalling weakness in the labour market.

The rand weakened further against the dollar yesterday, closing at USDZAR10.78, compared with Friday’s close of USDZAR10.76. Local currency depreciation occurred alongside a mixed performance from the dollar against the major crosses. The rand depreciated into a mixed performance from the commodity currencies and EM currencies we monitor. The dollar weakened against the euro and yen, while strengthening against the pound. Two of the five commodity currencies we monitor – namely the CAD and the ZAR – depreciated on the day. The remaining three currencies (the NOK, the NZD and the AUD) appreciated. Four of the nine EM currencies we monitor for the purposes of this report – namely the IDR, the TRY, the RUB and the HUF – appreciated on the day. The remaining EM currencies we monitor, depreciated. The rand was the second-worst-performing commodity currency (beating only the CAD) and was the fourth-worst-performing EM currency (beating only the BRL, the INR, and the MXN). The rand traded between a low of USDZAR10.7453 and a high of USDZAR10.8267. Support from where the rand opened this morning sits at 10.7085, 10.6800, 10.6250, 10.5800, 10.5200 and 10.4800. Resistance levels sit at 10.7800, 10.8200, 10.9000, 10.9400 and 11.0000.

Turning to commodity prices, copper and Brent both fell by 0.4%, and gold and platinum both fell by 0.1%. The ALSI fell by 0.4%, while the EM MSCI rose by 0.2%. The EMBI spread widened by 0.2 of a bp, while the SA CDS 5yr spread compressed by 1 bp. The CBOE VIX index, a volatility proxy for global risk appetite/aversion, rose by 9.8%.

Non-residents were mild net sellers of local equities (-ZAR132 million) but were net buyers of local bonds (ZAR185 million) on the day. Buying was seen in the 7-12 (ZAR380 million) and 1-3 (ZAR0.5 million) year buckets. Selling was meanwhile seen in the 3-7 (-ZAR104 million) and 12+ (-ZAR92 million) year segments. Bond yields fell on the day by between 3 bps (R208, R186 and R214) and 4 bps (R203). The 3x6, 6x9 and 12x15 FRAs rose by 3 bps, 2 bps and 4 bps.

FI

Today’s nominal government bond auction has ZAR500m on offer in the R2032, ZAR950m on offer in the R2037 and ZAR900m in the R2048. Overall demand at the past two weekly auctions has been declining, both in terms of total bids received at the offerings, as well as in pricing, which has seen bonds clearing at higher yields compared with market levels at the time. At last week’s auction, both the R2030 and the R2032 that were on offer, cleared at uncompetitive levels, while the R2048 was the only auction bond to price stronger against its market yield. The auction two weeks prior saw all three auction bonds clear at uncompetitive yields.

The local FI market weakened yesterday as yields rose by between 2.00 bp and 4.00 bps across the local yield curve. Yesterday’s overall weakening was marginal compared with the sharp selloff that occurred through most of the trading day on the back of a weaker local currency, and in contrast to the strengthening across US Treasury yields. At the short-end, the yield on the R157 rose by 3.00 bps to 6.76%. The yield on the R203 rose by the largest increment, of 4.00 bps to 7.37%. The yield on the R186 rose by 3.00 bps to 8.41%. The yield on the two longest-dated bonds, the R2048 and the R214 rose by 2.00 bps each to 9.11% and 9.05% respectively, while the R2037 rose by the smallest increment, of 2.00 bps to 9.05% (despite its slightly shorter tenor compared with the R214). USDZAR depreciated by 2c yesterday, to USDZAR10.78.

The yield curve flattened marginally yesterday; at the front-end, the spread on the R186/R157 remained unchanged, ending the day at 165.00 bps, and at the belly and the long-end, the spreads on the R213/R186 and the R2048/R186 both compressed by 0.50 of a bp to 45.50 bps and 69.50 bps respectively.

Foreigners were net buyers of nominal SAGBs yesterday, for a total of +ZAR185m. Foreigner’s purchased +ZAR380m in the R2023 comprising the 7-12year segment. This was partially offset by net selling in the 3-7 year (-ZAR104m) and 12+ year (-ZAR92m). In the 3-7 year segment, foreigners sold -ZAR165m in the R208, and in the 12+ year segment, notable buying of +ZAR243m in the R186, was offset by net selling in the R2037 (-ZAR212m) and the R2030.

The US bond market re-opened yesterday, following the US Independence Day holiday last Friday. The US Treasury curve flattened, as USTs strengthened overall. The exception was the yield on the 2yr UST, which rose by a marginal 0.60 of a bp to 0.51%. The yield on the 5yr UST fell by 0.49 of a bp to 1.73% and the yield on the 10yr note fell by 2.73 bps to 2.61%. The 30yr note strengthened by the largest increment, of 3.32 bps to a yield of 3.44%.

EM FI markets we monitor for the purposes of our reports weakened overall yesterday. 5yr EM bond yields rose by 0.43 of a bp on average, and 10yr yields remained broadly unchanged on average. SA’s FI market underperformed relative to the EM average; the 5yr yield rose by 2.50 bps and the 10yr yield rose by 2.80 bps. Poland’s FI market recorded the best performance in the 5yr space, with the yield declining by 2.70 bps yesterday, followed by Indonesia’s 5yr yield, which fell by 1.30 bps. Indonesia’s 10yr yield recorded the best performance, having declined by 4.90 bps yesterday, followed by Poland’s 10yr yield, which declined by 3.10 bps. Brazil’s 10yr yield fell by 2.40 bps. Russia’s FI market recorded the worst performance in the 5yr and 10yr spaces as the yields rose by 3.74 bps and 3.03 bps respectively. SA was the second-worst performer in the 5yr space. In the 10yr space, Turkey’s yield recorded the second-worst performance, rising by 3.00 bps, followed by India’s yield, which rose by 2.80 bps.

Considering EM currencies, the Indonesian rupiah appreciated significantly yesterday, by 1.35%, in contrast to the majority of EM currencies that we monitor for the purposes of our reports. The significant appreciation comes ahead of the country’s presidential election, which takes place tomorrow. Other currencies that appreciated on the day, albeit marginally in comparison, were the Polish zloty (0.20%), the Turkish lira (0.20%), the Russian ruble (0.11%) and the Hungarian forint (0.10%). In contrast, the currencies that depreciated were the Brazilian real (0.50%), the Indian rupee (0.47%), the Mexican peso, the rand (0.21%), and the Thai bhat (0.13%).

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