Standard Bank Research Team
Standard Bank
FI
The rand has come back slightly stronger in early morning trade and has been given some support from the stronger than expected China Manufacturing PMI. The print came out at 50.5, up from the prior month’s 50.2 and above Bloomberg consensus of 50.0. This should provide some early strength to local bonds but, with little liquidity this week, putting on large trades is more difficult than usual.
Today’s SAGB auction sees NT offer ZAR900m of the R2032, ZAR650m of the 2037 and ZAR800m of the R2044. The R2044 is still eligible for the increased 100% non-competitive auction option but, with almost ZAR8.5bn outstanding, this may be the last auction where the increased allowance is available. Despite the lower liquidity, we expect a fairly good auction today.
Tomorrow’s heritage day already impacted the local FI market on Monday, with turnover recorded at just ZAR9.2bn of nominal SAGBs. 48% of the turnover was due to the R186, with a further 14% of turnover due to the R208. The story of the day though was weaker EM, with the rand losing 9c against the US dollar and closing at 11.17, while the SA sovereign CDS moved 10 bps wider. Despite the currency moves, local bonds were slightly stronger on the day, led by a -2.5 bp move in the R186. The front-end of the curve flattened by 2 bps, while the belly and back-end spreads steepened slightly. FRAs followed bonds, shifting slightly lower, apart from the 6x9 which moved slightly higher after covering the likely March 2015 MPC date.
Offshore investors were net buyers of a marginal ZAR103m. +ZAR538m was bought in the 12+yr bucket (+ZAR615m in the R186, -ZAR211m in the R209), while -ZAR496m was sold in the 3-7yr bucket (-ZAR189m in the R204, -ZAR164m in the R208 and 0ZAR143m in the R207). In the 1-3yr bucket, +ZAR165m was bought in the R158, offset by -ZAR158m being sold in the R203.
All US Treasuries, apart from the 30yr note strengthened on the day, with 10yr now trading at 2.56%. 5yr local currency EM sovereign bonds strengthened by an average of 1.0 bp, while 10yr bonds weakened by an average of 2.3 bps. Chinese and Polish bonds led the moves stronger in both tenors. In the 5yr tenor, South Africa was in the middle of the pack, with Russia an outlier and its bond moving 5.7 bps weaker. South Africa had the third best performing 10yr bond, with significant weakness in Turkey and Brazil bonds.
The Bank of Canada’s Senior Deputy Governor, Carolyn Wilkins, has commented on the potential growth rate and neutral interest rate levels in industrialised countries, saying that “potential output growth in Canada and other economies will be lower than it was in the years leading up to the crisis”. The Bank sees the neutral nominal interest rate at “between 3 and 4 per cent, down from a range of 4.5 to 5.5 per cent in the mid-2000s”. The current overnight rate is 1%, which means that “monetary policy is stimulative”. In addition, the central bank estimates that potential output growth in Canada “will average just below 2 per cent over the next two years. This is a percentage point lower than average potential growth in the decade prior to the crisis”. The question of where neutral rates now lie, compared to historical levels is faced in South Africa as well. In addition, South Africa is also seen as having a lower potential growth rate currently, compared to pre-crisis levels, with potential having now fallen to below 3.0%, compared with the previous level of around 3.5%.
FX
The rand depreciated significantly against the US dollar yesterday for the fifth consecutive trading day, closing at USDZAR11.17, compared with Friday’s close of USDZAR11.08. Intraday, the USDZAR broke through two resistance levels (USDZAR11.12 and USDZAR11.18), spiking to a level of 11.1881, a level last seen in early February 2014. The rand’s depreciation against the greenback occurred despite a weak performance from the dollar against the major crosses, and into weakness across almost all of the commodity and EM currencies we monitor. The local currency depreciation also occurred alongside a noteworthy dip in global risk appetite and despite some weakness in all of the commodity prices. The dollar weakened against the euro, the pound and the yen, with the biggest move seen against the pound (0.5%). The rand depreciated against all of the major crosses with the biggest move seen against both the euro and the yen (approximately ±1.0%). All but one of the commodity currencies we monitor for the purposes of this report depreciated on the day, with the rand being the worst performer (depreciated the most of the five commodity currencies against the dollar). The exception was the NOK, which appreciated. All but one of the EM currencies we monitor for the purposes of this report depreciated on the day. The exception was the INR, which appreciated slightly. The rand was the second-worst performing currency in the EM currencies category (beating the BRL). The rand traded between a low of USDZAR11.0427 and a high of USDZAR11.1881. Support from where the rand opened this morning sits at 11.1200, 11.0500, 10.9600, 10.9050 and 10.8500. Resistance levels sit at 11.1800, 11.2500, 11.3100 and 11.3600.
Turning to commodity prices, copper, Brent, platinum and gold fell by 1.7%, 1.4%, 0.8% and 0.1% respectively. The ALSI fell by 2.0% and the EM MSCI dipped by 1.3 %. The EMBI spread widened by 1 bp and SA’s 5yr CDS spread widened by 8 bps. The CBOE VIX index, a volatility proxy for global risk appetite/aversion, rose by 13.1%.
Non-residents were moderate net sellers of local equities (-ZAR654 million) but were mild net buyers of local bonds (ZAR103 million). Buying of bonds was seen in the 12+ (ZAR538 million) and 1-3 (ZAR62 million) year buckets. Selling was meanwhile seen in the 3-7 (-ZAR496 million) and 7-12 (-ZAR2 million) year segments. Bond yields fell by between 0.5 of bp (R203) and 3 bps (R186). The 3x6 and 12x15 FRAs fell by 1 bp and 2 bps, respectively, while the 6x9 FRA rose by 5 bps.
With regard to international data releases, the euro zone PMI flash data today could set the early tone for the euro and the rate markets in the euro zone. According to our G10 strategist, Steven Barrow, the PMI has been slipping and was not too far above the key 50 level last month at 50.7. The consensus for the early September release is 50.6. The range on the forecasts is from 50.1 to 51.5 and there’s a skew to the low side with 18 of the 34 estimates below the consensus and 12 above. Barrow believes the number will be on the low side but, given the skew is low anyway, we suspect it might take a sub-50 number to really get the euro and rates moving down.
Latest SA publications
Fixed Income Weekly: Dovish SARB forecasts are bond positive by Asher Lipson and Kuvasha Naidoo (19 September 2014)
Credit & Securitisation Weekly: Eskom support package announced by Robyn MacLennan and Steffen Kriel (19 September 2014)
South Africa FIC: MPC meeting: less hawkish by Bruce Donald and Marc Ground (19 September 2014)
SA Fixed Income ALBI note: October ALBI reweighting by Asher Lipson and Kuvasha Naidoo (16 September 2014)
South Africa FIC: MPC meeting: back in a corner by Bruce Donald (15 September 2014)
TX Thematic: The Fed, the SARB & the rand: life after “lift-off” by Bruce Donald (15 September 2014)
FX Weekly: FOMC & MPC: you go first by Bruce Donald, Marc Ground and Varushka Singh (15 September 2014)
Credit & Securitisation Weekly: S&P comments on local banks by Robyn MacLennan and Steffen Kriel (12 September 2014)
Fixed Income Weekly: Jibar, the repo rate and FRAs by Asher Lipson and Kuvasha Naidoo (11 September 2014)
FX Weekly: ZAR: cheap but still vulnerable by Bruce Donald, Marc Ground and Varushka Singh (8 September 2014)
Fixed Income Weekly: 2013/14 debt management report released by Asher Lipson and Kuvasha Naidoo (5 September 2014)
Credit & Securitisation Monthly: Focus on: ACSA’s FY:14 results by Robyn MacLennan and Steffen Kriel (5 September 2014)
Credit & Securitisation Flash Note: Growthpoint Properties by Robyn MacLennan (2 September 2014)
Credit & Securitisation Flash Note: HomeChoice Holdings Ltd by Steffen Kriel (1 September 2014)
Fixed Income Weekly: SA's revenue conundrum by Asher Lipson and Kuvasha Naidoo (29 August 2014)
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