Standard Bank Research Team
Standard Bank
FX
After a quiet day yesterday the data calendar steps up a few gears today, especially in Europe. Steve Barrow (our G10 FIC Strategist) thinks that Germany’s ZEW survey, to be released this morning, might receive a bit more attention than usual because concerns of a German slowdown have mushroomed. The market looks for more weakness in both the current situation component and the expectations component. Both have fallen sharply in recent months. However, Steve notes that the survey is not an especially good guide of future GDP. More specifically, the ZEW survey has plunged many times in recent years but GDP has not always fallen in tandem. So, while it seems a reasonable bet that the ZEW survey will fall again today, it should not be taken as a given that this implies a deep recession will follow. The Eurozone is likely to release some truly horrible August industrial production data today (Bloomberg consensus: -1.6% m/m, seasonally adjusted) following on from the German slump of 4% m/m that we saw last week. But whether all this will weigh on the euro is another matter. Steve points out that the market has become conditioned to the idea that weakness in the Eurozone condemns the Fed to a later “liftoff” which, in turn, hampers the dollar. His view is that this logic is pretty flawed on many levels and really all that’s going on is that the market is trying to fit some sort of fundamental story to explain the fact that the market has become very long of the dollar, prompting profit-taking.
The rand strengthened against the US dollar yesterday, closing at USDZAR11.04, compared with Friday’s close of USDZAR11.12. Rand strength against the greenback occurred into a weak performance from the dollar against the major crosses, but into a stronger performance among almost all of the commodity and EM currencies we monitor for purposes of this report. The dollar weakened against all of the major crosses, with the biggest move seen against the euro (1.0%). The rand strengthened against the dollar and the pound, while weakening against the euro and the yen. All but one of the commodity currencies we monitor for the purposes of this report strengthened on the day. The exception was the CAD which remained unchanged due to a public holiday. All but one of the EM currencies we monitor for the purposes of this report strengthened on the day. The exception was the RUB which depreciated on the day. The rand took up the middle position in the commodity currencies category and was the fourth-best performing currency in the EM currencies category (beaten only by the TRY, the HUF and the BRL). The rand traded between a low of USDZAR11.0056 and a high of USDZAR11.1311. Support from where the rand opened this morning sits at 11.0400, 10.9500, 10.9200, 10.8000 and 10.7500. Resistance levels sit at 11.1650, 11.2450, 11.3100, 11.3550 and 11.4000.
Commodity price moves were mostly weaker. Gold and copper both rose by 1.0%, and platinum rose by 0.1%. Brent meanwhile fell by 1.5%. The developed market MSCI fell by 0.8%, the EM MSCI rose by 0.2% and the ALSI rose by 0.6%. The EMBI spread widened by 8 bps and SA’s 5yr CDS spread compressed by 4 bps. The CBOE VIX index, a volatility based proxy for global risk appetite/aversion, rose by 16.0%.
Non-residents were mild net sellers of local equities (-ZAR257 million) but were mild net buyers of local bonds (ZAR362 million) on the day. Buying was seen in the long-dated 12+ (ZAR775 million) year bucket. Selling of bonds was meanwhile seen in the 1-3 (-ZAR304 million), 7-12 (-ZAR60 million) and 3-7 (-ZAR50 million) year segments. Bond yields fell by between 4 bps (R214) and 8 bps (R203). The 3x6, 6x9 and 12x15 FRAs fell 2 bps, 3 bps and 6 bps, respectively.
FI
Overnight the currency was stable and with little data releases due, we should see range bound trade in FI today. Bonds are continuing though to take direction from the currency. The FI focus today will be on the auction, with ZAR800m R2032, ZAR800m R2037 and ZAR750m R2044 on offer. The average tenor of the bonds on offer is 23.05 years, three years shorter than last week’s auction, which had an average tenor of 26.04 years. On a weighted basis, the upcoming auction has a very similar average tenor of 22.91 years due to the almost equitable amounts being offered across the three bonds.
Yesterday’s US public holiday meant an extremely quiet day with the JSE recording turnover at just ZAR10.8bn in nominal bonds. 48.2% of turnover was due to trade in the R186, with a further 10.6% due to trade in the R207. The curve bull steepened, with bond moves led by the R203 and R204, which were -7.5 bps lower on the day. The R186 strengthened by 7.0 bps. FRAs came off lower, but are pricing in 20.5 bps of hikes at the November MPC meeting and a cumulative 38.5 bps over the November and January MPC meetings.
Non-residents were net buyers of nominal SAGBs yesterday for a total of +ZAR362m. While significant inflows were recorded in the 12+ year segment (+ZAR775m), the remaining three maturity categories all recorded net foreign selling on the day. In the 12+ year segment, notable buying was recorded in the R186 (+ZAR576m), R209 (+ZAR258m) and R2048 (+ZAR170m); this was partially offset by net selling in the R2044 of -ZAR251m. The 1-3 year segment was the only maturity category to record notable net selling by foreigners yesterday, for a total of -ZAR304m. This was due to outflows of -ZAR183m recorded in the R158, while the R203 and the R159 also sold off on a net basis.
US Treasuries did not trade yesterday as US financial markets were closed for the country’s Columbus Day public holiday.
EM FI and currency markets strengthened yesterday. In the FI space, 5yr local currency sovereign yields fell by an average of 5.57 bps and 10yr yields fell by an average of 9.61 bps. SA recorded a decent performance, outperforming the EM average in the 5yr space and slightly underperforming in the 10yr space. In the 5yr space, SA’s yield declined by 6.30 bps behind larger moves stronger seen in Turkey (-13.00 bps) and Hungary (-12.00 bps). In the 10yr space, SA’s yield declined by 6.10 bps behind stronger moves recorded in Brazil (-30.40 bps), Turkey (-22.00 bps) and Hungary (-13.00 bps). Notably all EM FI market 5yr and 10yr notes recorded stronger moves yesterday.
EM currencies appreciated against the US dollar yesterday. The only exception was the Russian ruble which depreciated by 0.35% on the day. The Brazilian real led the moves stronger, appreciating by 1.43%. This was followed by notable appreciations recorded in the Polish zloty (0.88%), Hungarian forint (0.81%), Turkish lira (0.79%) and SA rand (0.69%). Marginal currency appreciation was also recorded in the Indian rupee (0.37%), Mexican peso (0.24%), Indonesian rupiah (0.17%) and Thai baht (0.14%) yesterday.
Latest SA publications
Fixed Income Weekly: Moody's still to act on SA by Asher Lipson and Kuvasha Naidoo (10 October 2014)
Fixed Income ALBI note: November ALBI reweighting; R2032 joins the index by Asher Lipson and Kuvasha Naidoo (10 October 2014)
Credit & Securitisation Weekly: S&P comments on Eskom package by Robyn MacLennan and Steffen Kriel (10 October 2014)
Fixed Income Trade Idea: Receive 3x6, 5x8 FRAs by Asher Lipson and Kuvasha Naidoo (8 October 2014)
South Africa: Credit: SA property sector: Challenging environment ahead for office and industrial sectors by Robyn MacLennan and Steffen Kriel (8 October 2014)
SA FX Weekly: Asymmetric risk by Marc Ground, Bruce Donald and Varushka Singh (6 October 2014)
Credit & Securitisation Monthly: Quarterly update – Q3 2014 by Robyn MacLennan and Steffen Kriel (3 October 2014)
Fixed Income Weekly: Revenue slightly behind, issuance well ahead by Asher Lipson and Kuvasha Naidoo (3 October 2014)
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