Concluding a week of uncertainty

FI

We officially have 100 days until the end of the year. After a week laced with a particularly large amount of uncertainty, the SA market has come through relatively unscathed: the SARB kept rates on hold, and Scotland voted to stay in the union. Our FX traders report that according to Dodd-Frank reporting data there is a larger amount of ZAR option expiries rolling off this afternoon at levels slightly below where the currency is trading. This suggests some degree of stability from the currency, which should be supportive of bonds. There is little local data this week to excite the market, with only PPI on Thursday providing some information. However, this week is likely to be extremely disrupted with Wednesday’s Heritage Day public holiday. The immediate question in the market will be who the new SARB governor will be, but also of importance will be who the new MPC member will be.

Friday saw turnover of ZAR19.5bn in nominal SAGB and a further ZAR2.15bn in inflation-linked SAGBs. 45% of turnover came from the R186, with the R203 and R208 each contributing another 11% of turnover. Bonds rallied across the curve following the MPC’s decision to keep rates on hold on Thursday. Bonds were led by a 6.5 bp move stronger from the R203 and a 3.00 bp move stronger from the benchmark R186. The front-end of the curve steepened, while the back-end of the curve flattened slightly. FRAs adjusted slightly lower for a second consecutive day, with the 6x9 and 9x12 FRA points now 6 and 5 bps lower over the past five days.

The ILB auction on Friday saw total bids of ZAR1.12bn from 19 investors. ZAR235m was raised in the I2025, ZAR345m in the I2038 and ZAR220m in the I2050. The I2050 cleared at the prior day’s closing levels, while the I2025 and I2038 cleared 2 bps wider than their closing levels.

Offshore investors were recorded as selling almost ZAR300m of bonds, with selling of front-end buckets and buying of back-end buckets. Selling was predominantly in the R208 (-ZAR598.7m), R203 (-ZAR242.5m), R214 (-ZAR176.3m), R2044 (-ZAR148.1m) and R213 (-ZAR114m). This was offset by buying in the R209 (+ZAR394.1m), R186 (+ZAR379m), R2030 (+ZAR177.0m), R2032 (+ZAR135m) and R2023 (+ZAR110.4m).

USTs, apart from the 2yr bond, rallied on Friday. The 10yr moved almost 4 bps lower, and is now trading at 2.56%. EM bonds rallied on average on Friday. 5yr and 10yr EM sovereign local currency bonds rallied by an average of -1.4 bps and -2.8 bps respectively. South African bonds performed in the middle of the 5yr pack and was amongst the weaker 10yr bond moves. 5yr bond moves were led by moves in Russia (-4.0 bps), Poland (-3.5 bps) and Hungary (-2 bps). 10yr bond moves were led by Indonesia (-6.5 bps), Poland (-5.0 bps) and Turkey (-5.0 bps). Eastern European countries led the moves during the week, with Russia, Poland and Hungary seeing the largest moves in both tenors.

FX

On the international data front, ECB President Draghi testifies to the European Parliament’s Economic and Monetary Committee today. According to our G10 analyst, Steven Barrow, it comes in the wake of the recent interest rate reduction and the elucidation of plans to buy Asset-Backed Securities (ABS) – and covered bonds. Barrow mentions in his report that Draghi’s aim to add around EUR1tr to the ECB’s balance sheet, might prove very hopeful with just the new programs he has at his disposal (the TLTROs and ABS/covered bond purchases). However, Barrow expects Draghi to be upbeat about the likely success of these initiatives and, while not ruling out further action – like government bond-based QE – he is more likely to hint that the Bank wants to give these schemes a fair chance first. He knows that full-on QE could be difficult in many respects, such as allocating bond purchases between individual bond markets and a possible legal challenge in the German Constitutional Court. Draghi has spoken recently about the need for fiscal policy to supplement what the ECB is trying to do on the monetary side. Although much of Draghi’s advice lies well within the aims of euro zone governments, such as structural reforms, there are clearly hints that he would like to see fiscal policy as a net contributor to euro zone recovery, not a net detractor. We may find out today if his ‘useful’ advice is taken on board. Draghi has noted, somewhat ironically, the IMF’s ‘useful’ advice to the ECB in the past (which mainly consists of pleas to undertake QE). He sees it as an irritant and may well find today that the EU parliament takes the same view of his advice on fiscal policy.

Also, the US releases existing home sales data today. The consensus is for a 5.2m rate, up from 5.15m last time. However, the skew on the forecasts in the Bloomberg survey is to the downside with 18 of the 45 respondents in the survey seeing a low number and 12 anticipating something above 5.20mn. But Barrow thinks that the trend remains pretty solid in sales and prices and hence think that the risk lies to the high side.

The rand depreciated slightly against the US dollar on Friday for the fourth consecutive day, closing at USDZAR11.0826, compared with Thursday’s close of USDZAR11.0798. The rand’s depreciation against the greenback occurred into a strong performance from the dollar against the major crosses, and weakness across all of the commodity currencies. The local currency depreciation also occurred alongside a slight dip in global risk appetite and despite some weakness in most commodity prices. The dollar strengthened against the euro, the pound and the yen, with the biggest move seen against both the pound and the euro (approximately -0.7%). The rand appreciated against the euro, the pound and the yen, while weakening against the dollar. As mentioned before, all of the commodity currencies we monitor for the purposes of this report depreciated on the day, with the rand being the best performer (depreciated the least of the five commodity currencies). Four of the nine EM currencies we monitor for the purposes of this report – namely the ZAR, the BRL, the TRY and the HUF – depreciated on the day. The remaining five currencies – namely the MXN, the THB, the RUB, the IDR and the INR – appreciated on the day. The rand took up the middle to higher position in the EM currencies category (beating the BRL, the TRY and the HUF). The rand traded between a low of USDZAR10.9875 and a high of USDZAR11.1128. Support from where the rand opened this morning sits at 11.0200, 10.9600, 10.9050 and 10.8500. Resistance levels sit at 11.1200, 11.1800 and 11.2500.

Turning to commodity prices, both gold and platinum fell by 0.8%, and copper fell by 0.1%. Brent meanwhile rose by 0.7%. The ALSI remained more or less unchanged, while the EM MSCI dipped by 0.2 %. The EMBI spread and SA’s 5yr CDS spread both compressed by 1 bp. The CBOE VIX index, a volatility proxy for global risk appetite/aversion, rose by 0.7%.

Non-residents were very aggressive net sellers of local equities (-ZAR4 198 million) and were mild net sellers of local bonds (-ZAR295 million). Selling of bonds was seen in the shorter-dated 3-7 (-ZAR650 million) and 1-3 (-ZAR345 million) year buckets. Buying was meanwhile seen in the longer-dated 12+ (ZAR590 million) and 7-12 (ZAR110 million) year segments. Bond yields fell by between 3 bps (R208 and R186) and 6 bps (R203). The 3x6 FRA fell by 1 bp, and the 6x9 and 12x15 FRAs both fell by 3 bps.

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