Fischer: structural, global growth stepdown

FX

During an address to a Swedish Finance Ministry conference last night, Fed Vice Chair Stanley Fischer commented on the difficulty of distinguishing between which part of the apparent supply side weakness in the US economy was owing to structural, as opposed to cyclical, factors. He also implied that a structural stepdown in economic growth might be more widespread than just in the US. He noted that “the global recovery has been disappointing … with performance in emerging Asia, importantly China, stepping down sharply from the post-crisis surge, to rates significantly below the average pace in the decade before the crisis”. He added that, “A similar stepdown has been seen recently for other regions including Latin America”. He did not give much away regarding future policy moves, merely stating that, even with its unusually large balance sheet, when the time comes to raise rates, the Fed has the necessary tools to “maintain them near their target level”. The tools he referred to where those mentioned in the minutes of the 17 to 18 June FOMC meeting - that is, the interest paid on excess reserves (IOER) and the fixed-rate overnight reverse repurchase agreement (ON RRP) facility. We look to the minutes of the last FOMC meeting (29 to 30 July) to be published 20 August for perhaps some more insight into these measures and the Fed’s plans beyond the end of quantitative easing.

The international calendar is pretty light today, with German and Eurozone ZEW survey results for the month of August the only notable releases. Steve Barrow, our G10 FIC Strategist, notes that for Germany, the ZEW survey’s expectations component, has been falling for a few months now and the reading on the current situation has very recently started to follow suit. Not surprisingly, this has coincided with a more general deterioration in expectations concerning the German outlook and, with the prospect of sanctions against Russia starting to bite into growth as well, it is not too surprising that the market looks for more weakness in today’s August release. However, with the consensus forecast at 54.0, after 61.8 last time, Steve thinks the market might have become a bit too pessimistic here, and that the same can be said for the expectations component, which is seen slumping to 17.0 from 27.1 last time. Steve still expects the surveys to fall compared with last month, but perhaps not as much as the market anticipates.

The rand strengthened further against the US dollar yesterday, closing at USDZAR10.63, compared with Friday’s close of USDZAR10.66. Rand strength occurred into a mixed performance from the dollar against the major crosses on the back of an increase in global risk appetite and despite further softening of most commodity prices. The rand appreciated alongside a strong performance from the majority of the commodity and EM currencies we monitor for the purposes of this report. The dollar strengthened against the euro and the yen, while weakening against the pound. The rand strengthened against all the major crosses, with the biggest moves seen against the euro and the yen (±0.4%). The euro lost ground on news that the pace of growth in the Eurozone slowed in Q2 and that the region’s inflation rate remained at less than half the ECB’s goal. Three of the five commodity currencies we monitor – namely the NOK, the CAD and the ZAR – appreciated on the day. The NOK was the best-performing commodity currency alongside on news from the Nordic nation indicating that its inflation exceeded economists’ forecasts. The remaining two – namely, the NZD and the AUD – depreciated. All but three of the EM currencies we monitor appreciated on the day. The exceptions were the INR, the TRY and the HUF. The rand took up the middle position in both currency categories. The rand traded between a low of USDZAR10.6212 and a high of USDZAR10.7175. Support from where the rand opened this morning sits at 10.6400, 10.5650, 10.4850 and 10.4560. Resistance levels sit at 10.7200, 10.7700, 10.8500 and 10.9400.

Turning to commodity prices, platinum, Brent and gold fell by 0.4%, 0.3% and 0.2% respectively. Copper was meanwhile unchanged. The ALSI rose by 1.7% and the EM MSCI by 1.5%. The EMBI spread compressed by 6 bps and the SA CDS 5yr spread by 7 bps. The CBOE VIX index, a volatility proxy for global risk appetite/aversion, fell by 9.8%.

Non-residents were aggressive net buyers of local equities (ZAR1 304 million) but were mild net sellers of local bonds (-ZAR215 million) on the day. Selling of bonds was seen in the 12+ (-ZAR554 million) year bucket. Buying was meanwhile seen in the 7-12 (ZAR190 million), 3-7 (ZAR79 million) and 1-3 (ZAR70million) year segments. Bond yields consequently rose by between 1 bps (R203, R208 and R186) and 3 bps (R214) into slight bear curve steepening. The 3x6 FRA rose by 2 bps, while the 12x15 FRA fell by 1 bp; the 6x9 FRA was unchanged.

FI

Auction day today, with ZAR1.00bn on offer in the R2032, ZAR850m of offer in the R2037 and ZAR500m in the R2044. The R2032 and R2044 will again have the boosted 100% non-competitive auction options available. However, recent price action and a weaker currency this morning suggests that we should not be expecting a great auction today.

Yesterday felt like an extremely quiet day in the SAGB market and the stats back this up. The JSE records nominal SAGB turnover at just ZAR6.8bn, with another ZAR488m in inflation-linked bonds. Perhaps a slight hangover from Friday’s moves, with little natural buyers, though bond holders were not rushing to sell either. The R186 accounted for slightly over a third of nominal turnover, with the R207 and R2048 each contributing another 10%. General weakness saw bonds drift higher, with the back-end moving 2.5 – 3.0 bps higher. The benchmark R186 moved 1 bp weaker, with some pressure also coming through on the R207 with a 2.5 bp move. The belly and back-end of the curve bear steepened, with the front-end R186/R203 flattening by half a bp. US Treasuries delivered a mixed performance yesterday, with shorter-dated notes strengthening, while longer-dated notes weakened on the day. The sovereign CDS did see a good move on the day, with a 10 bp compression to trade at 190 bps. The yield on the 2yr UST fell by 0.41 of a bp to 0.44%, and the 5yr note fell by 0.82 of a bp to 1.62%. At the longer-end, the yield on the 10yr UST rose by 0.72 of a bp to 2.43%, and the 30yr note rose by 1.29 bps, to a yield of 3.24%.

Non-residents were net sellers of nominal SAGBs yesterday for a total of -ZAR215m. Net selling was concentrated in the 12+ year segment, primarily due to net selling in the R186 of -ZAR673m; this was partially offset by foreign inflows into the R2048 (+ZAR212m). Notable net buying in the 3-7 year segment was seen in the R207 (+ZAR130m), while foreigners sold -ZAR85m in the R204 in this category. Foreigners purchased +ZAR190m in the R2023 in the 7-12 year maturity segment yesterday.

EM financial markets were temporarily swayed by idiosyncratic risks arising from Turkey yesterday, with currencies generally weakening, following an outright victory of Recep Tayyip Erdogen in Sunday’s presidential election. This was meant to be the first round of the presidential election voting process. Fitch Ratings released a comment yesterday, noting that “the first round of Turkey’s popular presidential election does little to ameliorate the political risk to Turkey’s sovereign credit profile”. In addition, the outright victory result of Sunday “avoids a second ballot and confirms Erdogen’s personal standing with a large part of the electorate”. The agency cautioned that “political risk will weigh on Turkey’s ratings through its potential efforts to discourage capital inflows and reduce policy uncertainty”. Parliamentary elections are scheduled to be held by June 2015 at the latest. Fitch noted that so far, “Turkey has been remarkably resilient to recent external shocks”; however, if political risk feeds negatively into government effectiveness and policy predictability, it could lead to an adverse rating action.

SA delivered a poor performance in the FI space yesterday compared with the other EMs, whose FI markets generally strengthened on the day. This was in contrast to a stronger performance by the rand on the day. 5yr local currency EM yields fell by 4.56 bps on average and 10yr yields fell by 4.85 bps on average. However, this result was skewed by the significant strengthening recorded in Russia’s FI market, with its 5yr and 10yr yields declining by 33.76 bps and 29.74 bps yesterday. SA’s FI market recorded the second-worst performance in the 5yr space, with the yield rising by 2.50 bps, behind a 6.00 bps rise in Turkey’s 5yr yield, and recorded the worst perforance in the 10yr space, with the yield rising by a more marginal 1.20 bps. Turkey’s 10yr yield rose by 1.00 bp. FI markets in Brazil, India, Poland, Mexico, Indonesia and Hungary strengthened on balance yesterday.

EM currencies strengthened overall yesterday, with a few notable exceptions. The Hungarian forint depreciated by 0.39% and the Turkish lira depreciated by 0.25%. In contrast, the Indonesian rupiah led the moves stronger, appreciating by a significant 0.86%, followed by a 0.67% appreciation in the Russian ruble. Other EM currencies to appreciate materially on the day were the Mexican peso (0.52%), Brazilian real (0.34%) and SA rand (0.27%).

Latest SA publications

Fixed Income Weekly: Eskom’s likely effect on SAGBs and the fiscals by Asher Lipson and Kuvasha Naidoo (10 August 2014)

Credit & Securitisation Monthly: Curro Holdings Ltd by Robyn MacLennan and Steffen Kriel (8 August 2014)

FX Weekly: US labour market & inflation: checking the dials by Marc Ground and Varushka Singh (8 August 2014)

Credit & Securitisation Weekly: Eskom tariffs to rise by Robyn MacLennan and Steffen Kriel (1 August 2014)