Standard Bank Research Team
Standard Bank
FX
The minutes from the 17 to 18 June FOMC meeting, published later today, should be of considerable interest to the market. With new members, Fisher and Brainard, the dynamics within the Fed could be changing and the market will try to glean any clues in this regard, although it must be kept in mind that the minutes do not ascribe remarks to the specific individuals who made them. There has been some speculation that the minutes could prove somewhat more hawkish than the interpretation given by Fed Chair Yellen in the post-meeting press conference. Steve Barrow (our G10 FIC Strategist) thinks that the market will scour the minutes to see if more hawkish views are gaining ascendency, given that the market generally expects the Fed’s next move to be a rate hike (some time after it ends new bond purchases).
Yesterday’s release of the US Job Openings and Labor Turnover (JOLTS) data report for May wasn’t particularly interesting. The quits rate remained at a low 1.8% in May (all the indicators mentioned here are expressed as a percentage of total employment). The hires rate moved back down to 3.4% in May from an upwardly revised 3.5% in April. Encouragingly, the job openings rate continued to rise – from 3.1% in April to 3.2% in May. It is worth noting that the 12-month moving average of each of these indicators moved higher; a further signal of labour market improvement, although this is hardly surprising, given what we saw in last week’s Employment Situation Report.
Steve also notes that ECB President Draghi speaks at a memorial lecture for ex-ECB member Tomasso Padoa-Schioppa today. There’s no title for the speech but Steve expects Draghi to discuss the Bank’s policy and perhaps shed a bit more light on the thinking behind the ECB’s recent policy changes. There might be particular interest in any comments about the possibility of future QE – purchases of sovereign bonds in addition to the current plan to buy asset-backed securities. In all though, with monetary policy seemingly set for the next few months (the targeted long-term repos don’t happen until September and December) Steve doubts that ECB members can say much right now that will be likely to shake up the market.
The rand strengthened against the dollar yesterday, closing at USDZAR10.68, compared with Monday’s close of USDZAR10.78. Local currency appreciation occurred alongside a weak performance from the dollar against the major crosses. The rand appreciated into a strong performance from almost all of the commodity currencies and all of the EM currencies we monitor for the purposes of this report. The dollar weakened against the euro, the pound and the yen, with the biggest move seen against the yen (-0.3%). All of the commodity currencies we monitor appreciated on the day, the exception was the NOK which depreciated. All of the EM currencies we monitor for the purposes of this report appreciated on the day. The rand was the best-performing currency in both categories. The rand traded between a low of USDZAR10.6749 and a high of USDZAR10.7839. Support from where the rand opened this morning sits at 10.6700, 10.6150, 10.5800, 10.5000 and 10.2800. Resistance levels sit at 10.7800, 10.8200, 10.8650, 10.9600 and 11.0000.
Turning to commodity prices, Brent fell by 1.2%, and copper and gold both fell by 0.1%. Platinum meanwhile rose by 0.2%. The ALSI fell by 0.5%, while the EM MSCI rose by 0.04%. The EMBI spread widened by 1 bp, while the SA CDS 5yr spread compressed by 2 bps. The CBOE VIX index, a volatility proxy for global risk appetite/aversion, rose by 5.7%.
Non-residents were mild net sellers of local equities (-ZAR156 million) but were meaningful net buyers of local bonds (ZAR953 million) on the day. Buying was seen in the 12+ (ZAR881 million) and 3-7 (ZAR293 million) year buckets. Selling was meanwhile seen in the 1-3 (-ZAR136 million) and 7-12 (-ZAR86 million) year segments. Bond yields fell on the day by between 6 bps (R214) and 9 bps (R186). The 3x6, 6x9 and 12x15 FRAs fell by 4 bps, 5 bps and 7 bps.
In local labour news, with regard to the downing of tools in the metals and engineering sector, Numsa has denied rumours that employers were offering workers a 10% increase and said that the offer from Seifsa was between 8% and 9%. The union has remained unwavering in its demands for a 15% wage increase, the banning of labour brokers and a R1,000 housing allowance, believing that these demands are “reasonable”.
FI
Turnover was fairly low for an auction day yesterday, at ZAR23.63bn in nominal SAGBs. 25% of turnover was attributed to the R186, 16% to the R2048, 11% to the R2037 and 5% to the R2032. The nominal government bond auction of the R2032, R2037 and R2048, saw competitive pricing in the extended-maturity R2048, which cleared at 9.03%, 3.00 bps below its market level. This repeats the stellar performance that the bond saw at last week’s auction. The R2030 and R2037 both priced in line with their market levels yesterday, at 8.95% and 9.00% respectively. Bids totalling ZAR6.45bn were received, for an auction bid/cover ratio of 2.7x; this compares with bids of ZAR5.39bn (bid/cover: 2.3x) at last week’s offering. The R2037 and the R2048 received an almost equitable amount of investor interest at the offering, with 38.3% of bids going to the R2037 and 37.6% of bids going to the R2048. The R2032 received the remaining 24.1% in bids. Investor interest in the R2032 and the R2048 was aggressive, with a small proportion of total successful and fully allocated bids recorded in these bonds.
The front-end of the curve bull flattened, while the back-end bull-steepened. This came as the entire curve strengthened, led by the belly R186, R2030 and R213 bonds. The R157 moved 6 bps lower, the R186 moved 9 bps lower and the R2030 and R213 moved 8.5 bps lower. Back-end R214 and R2048 bonds moved 6 and 5.5 bps lower respectively. FRAs followed the stronger currency, moving 4 – 7 bps lower. 1x4s are now pricing in 27.5 bps, 3x6s are pricing in 47.5 bps, 6x9s are pricing in 74.5 bps and 12x15s are pricing 124.5 bps. Non-residents were net buyers of nominal SAGBs yesterday, for a total of +ZAR953m. Foreigner’s purchased +ZAR881m in the 12+ year segment; notable net buying in the R2032 (+ZAR551m), R186 (+ZAR622m), R2037 (+ZAR558m) and R2048 (+ZAR120m), was offset by selling in the R213 (-ZAR536m) and R209 (-ZAR428m) within this category. Foreigners purchased +ZAR293m in the 3-7 year segment, due to net buying in the R203 (+ZAR391m). -ZAR136m was sold in the R157 in the 1-3 year segment.
The US Treasury curve flattened further yesterday, as USTs strengthened overall. The yield on the 2yr UST fell by a marginal 0.79 of a bp to 0.50%. The yield on the 5yr UST fell by 4.11 bps to 1.69% and the yield on the 10yr note fell by 5.53 bps to 2.56%. The 30yr note strengthened by the largest increment, of 6.39 bps to a yield of 3.37%.
EM FI and currency markets we monitor for the purposes of our reports strengthened overall yesterday. 5yr EM bond yields fell by 1.96 bps on average, and 10yr yields fell by 3.02 bps on average. SA’s FI market recorded the best performance in both the 5yr and 10yr spaces, and outperformed relative to the EM average; the 5yr yield fell by 6.00 bps and the 10yr yield fell by 8.20 bps. Russia’s FI market recorded the second-best performance in the 5yr space, with the yield declining by 5.80 bps yesterday, followed by Poland’s 5yr yield, which fell by 4.80 bps and Hungary’s yield, which fell by 4.00 bps. Hungary’s 10yr yield recorded the second-best performance, having declined by 5.00 bps yesterday, followed by Russia’s 10yr yield, which declined by 4.92 bps, and Poland’s yield, which declined by 4.30 bps. Indonesia’s FI market recorded the worst performance in the 5yr space, as the yield rose by 3.60 bps and India recorded the worst performance in the 10yr space, with the yield increasing by 3.40 bps.
EM currencies appreciated significantly yesterday, with the rand leading the stronger moves. The rand appreciated by 0.90%, and the Indonesian rupiah appreciated by 0.74%, following a significant appreciation of 1.35% in the rupiah the prior day. The remaining EM currencies that we monitor also appreciated: the Brazilian real (0.51%), the Russian ruble (0.49%), the Hungarian forint (0.46%), the Polish zloty (0.45%), the Indian rupee (0.38%), the Mexican peso (0.30%), the Turkish lira (0.20%) and the Thai bhat (0.10%). We have noted that the large moves (stronger) in the Indonesian rupiah over the past few days has been the result of the country’s presidential elections, which is being held today. Indonesia will also conclude its central bank meeting tomorrow; Bloomberg market consensus forecasts are calling for an unchanged reference rate, which is currently 7.50%.
Latest SA publications
FX Weekly: A commodity currency by Marc Ground and Varushka Singh (4 July 2014)
Credit & Securitisation Monthly: Quarterly update: Q2 2014 by Robyn MacLennan and Steffen Kriel (4 July 2014)
Credit & Securitisation Flash Note: Transnet SOC Ltd by Robyn MacLennan and Steffen Kriel (1 July 2014)
Credit & Securitisation Weekly: Eskom rating concerns by Robyn MacLennan and Steffen Kriel (27 June 2014)
Fixed Income Weekly: Updating our curve views by Asher Lipson and Kuvasha Naidoo (20 June 2014)
FI Rating Comment: S&P downgrades SA, but Outlook to stable Asher Lipson and Kuvasha Naidoo (13 June 2014)
FI Rating Comment SA Rating comment: Fitch revises SA Outlook to Negative Asher Lipson and Kuvasha Naidoo (13 June 2014)
Fixed Income Special Report: SA's ratings - sentiment not so sweet by Asher Lipson and Kuvasha Naidoo (5 June 2014)
Fixed Income Update: Pricing the new R2032 by Asher Lipson and Kuvasha Naidoo (4 June 2014)
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