Standard Bank Research Team
Standard Bank
FX
Weaker-than-anticipated US retail sales, manufacturing and PPI numbers prompted a dip in the dollar yesterday afternoon. The headline retail sales figure fell -0.3% m/m in September. Analysts had expected a -0.1% m/m drop. The bigger surprise was retail sales excluding autos, which dropped -0.2% m/m, against a market expectation for a 0.2% m/m increase. The Empire measure of regional manufacturing activity came in at 6.17 for October, well below the consensus view of 20.25 and marking a six-month low. In m/m terms, headline PPI inflation dipped into negative territory, coming in at -0.1% for September. Analysts had predicted a 0.1% m/m increase. Core PPI inflation was unchanged in m/m terms. The annual rate came down to 1.6% from 1.8%.
Out today, US industrial production data for September is seen rising 0.4% m/m after a -0.1% m/m slide in August. Following the surprising weakness seen in yesterday’s US data releases – and the market’s notable reaction – there could be some nerves about the industrial production numbers, even though it is not usually seen as quite such an important release. Steve Barrow (our G10 FIC Strategist) thinks that the risks lie to the upside – although he doesn’t doubt that the market might prove more responsive to weak data, as the momentum is clearly with the Treasury market and against equities and the dollar.
The Eurozone releases revised CPI data for September today. The market expects that the provisional annual rate of 0.3% will be confirmed. This translates into a 0.4% monthly rate, compared to 0.1% in August. The 37 person Bloomberg survey shows that 36 anticipate that 0.3% will be confirmed for the annual rate. But Steve thinks there is a chance of a lower figure. He notes that we’ve seen plenty of Eurozone countries come out with very weak September CPI numbers, and hence there’s a chance that those countries that have not reported complete data as yet could also reveal low numbers. Nevertheless, even if inflation is confirmed at 0.3%, he stresses that we need to bear in mind that lower oil prices could have a more significant impact in the next month or two. At present, Steve thinks that the fall in energy prices could take 0.1 of a percentage point off the CPI and, starting out at just 0.3%, this clearly leaves little margin for error before deflation strikes.
The rand weakened slightly further against the US dollar yesterday, closing at USDZAR11.07, compared with Tuesday’s close of USDZAR11.06. There were massive swings in global currency markets yesterday in response to data surprises out of the US. The rand traded between a low of USDZAR10.9686 and a high of USDZAR11.1847 intraday. Rand weakness between closes against the greenback occurred despite a weak performance from the dollar against the major crosses, strength across all of the commodity currencies we monitor for purposes of this report except for the rand, and into a mixed performance from EM currencies. The dollar weakened against all of the major crosses, with the biggest move seen against the euro (1.4%). The rand weakened against all of the major crosses, with the biggest move seen against the euro (1.6%). Four of the nine EM currencies we monitor for the purposes of this report – namely the HUF, the RUB, the THB and the TRY – appreciated on the day. The remaining currencies – namely, the ZAR, IDR, MXN and BRL – depreciated on the day, while the INR was unchanged due to a public holiday. 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. Copper, Brent and platinum fell by 2.3%, 1.5% and 0.3% respectively. Gold meanwhile rose by 0.7%. The developed market MSCI fell by 1.0%, the EM MSCI fell by 1.0% and the ALSI fell by 2.2%. The EMBI spread widened by 9 bps and SA’s 5yr CDS spread widened by 10 bps. The CBOE VIX index, a volatility based proxy for global risk appetite/aversion, rose by 15.2%.
Non-residents were net buyers of local equities (ZAR538 million) and were marginal net buyers of local bonds (ZAR8 million) on the day. Buying was seen in the long-dated 12+ (ZAR471 million) and 1-3 (ZAR215 million) year buckets. Selling of bonds was meanwhile seen in the 3-7 (-ZAR372 million) and 7-12 (-ZAR110 million) year segments. Bond yields fell by between 6 bps (R186) and 7 bps (R203, R208 and R214) in a more or less downward parallel shift in the curve, in sympathy with lower US bond yields. The US 10-year treasury yield fell by 6 bps to 2.08%; intraday, it briefly dipped below the 2.0% mark. The 3x6, 6x9 and 12x15 FRAs fell by 4 bps, 7 bps and 11 bps respectively, likely on easing concerns about local monetary policy prospects in tandem with the action of yesterday’s US data on perceptions regarding the Fed’s policy normalisation path and a sliding oil price.
Local retail sales growth slowed to 2.1% y/y in August from 2.4% y/y in July, in part due to base effects of a 1.2% m/m (seasonally adjusted) increase in August 2013. The results nevertheless came in above the Bloomberg consensus forecast of 1.8% y/y. On a seasonally adjusted basis, retail sales grew 0.6% m/m in August compared to 1.2% m/m in July. YTD retail sales growth remains low in 2014 compared to 2013. SBGS Economist Kim Silberman infers from the data that y/y growth of durable goods and non-durable goods sales accelerated in August over July, whereas that of semi-durable goods slowed down. Growth in retail sales will likely be hindered in the period ahead by a sustained deceleration in household disposable incomes, elevated inflation, low consumer confidence, slowing growth in household credit extension, still elevated household debt levels (at least compared with long-term averages), as well as higher interest rates. We stick with our view that economic growth will continue to underperform against consensus and official expectations, to a large extent because domestic demand is likely to undershoot. Slowing consumer demand growth to our minds speaks to a SARB that, while prepared with hike rates to defend its inflation fighting credentials, will stay reluctant to tighten because of weak growth. We believe that the SARB is unlikely to tighten monetary policy by as much as the market expects over the next 12 months.
FI
The market was reminded what volatility is yesterday. In a rather crazy 90 mins after the poor US retail sales, PPI and Empire manufacturing, markets went a bit mad in what looked like a cleanout of some positions. If one had looked at USDZAR at the start of the day and then the end of the day, it looked like markets were unchanged. Inbetween, we saw USDZAR break through to below 11.00, the R186 went to a 8-handle and 10yr US Treasuries went below 2.00%. Then in the late-evening, USDZAR went back up to 11.18 and 10yr US Treasuries reached 2.15%, before settling back at 11.06 and 2.08% respectively. While the rand is seen as a volatile asset, US Treasuries are certainly not and some state of market shock is likely this morning. The closing yield of 2.14% on the 10yr UST showed a move of 6.15 bps on the day, but this hides the massive swings that we saw yesterday. All other US Treasuries also strengthened, led by a 9.75 bp move in the 5yr note.
We have been suggesting trading the R186 in a 7.90% - 8.35% range over the past few weeks and we think the R186 could drift slightly higher from current levels. The market will see ZAR1.175bn of additional supply today as all non-comp options are well in the money and we expect the full 50% to be taken up. This should put some late morning pressure on the curve.
Bloomberg reported yesterday that the government is considering selling its stake in Vodacom to finance the expected equity injection into Eskom. Government’s listed stake is 207,038,100 shares, owning 13.9% of Vodacom. At Vodacom’s current market value, the stake is worth around ZAR25.65bn. Our calculations show that since 2009, government has received approximately ZAR6.35bn in dividends due to its stake in Vodacom.
Turnover was slightly over ZAR22.2bn in nominal SAGBs. The R186 accounted for 55.7% of turnover, with the rest of the turnover split across the curve equally to either side of the bond. Offshore investors were recorded as marginal buyers, but with big trades in individual bonds. The curve bull flattened slightly, as bonds rallied by 6.5 – 8.5 bps on the day. The benchmark R186 moved 6.5 bps lower. FRAs followed the stronger currency and moved considerably lower. The 2x5 is now pricing in a lower 16.5 bps of hikes at the November meeting, while the 4x7 is pricing in 31.5 bps over two meetings. Our base case is for the SARB to hike by an additional 25 bps over the next two meetings. However, the move we are seeing in Brent is going to see people starting to adjust their Q4 inflation forecasts. Since 29 September, Brent in rand terms is down over 16%.
Lower inflation is evident in other EMs. Israel’s latest CPI inflation print for the month of September was released yesterday. This saw the month-on-month print remain in negative territory from August, recording -0.3% m/m against consensus expectations of -0.2% m/m, from the previous month’s print of -0.1% m/m. Year-on-year, inflation was taken into negative territory in September, recording a print of -0.3% y/y against consensus expectations of -0.2% y/y, from the previous month’s print of 0.0% y/y. The last time the country recorded deflationary figures on a year-on-year basis was in the period spanning October 2006 through June 2007. India’s September CPI inflation print, released earlier this week, saw a steep decline in the country’s year-on-year CPI, recording 6.46% y/y against a Bloomberg consensus forecast of 7.11% y/y, and from a prior month’s 7.80% y/y.
Non-residents were marginal net buyers of nominal SAGBs yesterday for a total of +ZAR8m. A few notable transactions were recorded, with these flows practically cancelling each other out. The 12+ year segment recorded net buying of +ZAR471m yesterday due to inflows recorded in R186 (+ZAR389m) and the R2048 (+ZAR284m), offset by net selling of -ZAR156m in the R214. The 3-7 year segment recorded net selling of -ZAR372m, due primarily to the R208 (-ZAR399m). Foreigners sold -ZAR110m in the R2023 in the 7-12 year bucket.
EM FI markets strengthened overall yesterday, led by Eastern European countries. Currency markets recorded a mixed performance. In the FI space, 5yr local currency sovereign yields fell by 7.85 bps on average and 10yr yields fell by 3.92 bps on average. The SA FI market strengthened yesterday, delivering a middle of the pack performance against its EM peers. The 5yr SA yield declined by 6.70 bps, underperforming the EM average and behind stronger moves recorded in Turkey (-19.00 bps), Hungary (-15.00 bps) and Russia (-12.38 bps). The SA 10yr yield declined by 5.40 bps, outperforming the EM average, but behind larger moves recorded in the same three respective countries; Turkey (-19.00 bps); Hungary (-13.00 bps); and Russia (-10.20 bps). In contrast, Brazil’s 10yr yield recorded a significant widening, with the yield increasing by 29.50 bps on the day.
Currencies to appreciate yesterday were the Polish zloty (0.98%), Hungarian forint (0.97%), Russian ruble (0.43%), Thai baht (0.24%) and Turkish lira (0.16%). The Brazilian real led the moves weaker, with the real depreciating by a substantial 2.39% on the day. This was followed by less stark moves weaker recorded in the Mexican peso (0.64%), Indonesian rupiah (0.17%) and SA rand (0.15%). The Indian rupee did not trade on the day.
Latest SA publications
Credit & Securitisation Flash Note: Calgro M3 Holdings Ltd by Robyn MacLennan and Steffen Kriel (14 October 2014)
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)
Certification
The analyst(s) who prepared this research report (denoted by an asterisk*) hereby certifies(y) that: (i) all of the views and opinions expressed in this research report accurately reflect the research analyst's(s') personal views about the subject investment(s) and issuer(s) and (ii) no part of the analyst’s(s’) compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed by the analyst(s) in this research report.
Conflict of Interest
It is the policy of The Standard Bank Group Limited and its worldwide affiliates and subsidiaries (together the “Standard Bank Group”) that research analysts may not be involved in activities in a way that suggests that he or she is representing the interests of any member of the Standard Bank Group or its clients if this is reasonably likely to appear to be inconsistent with providing independent investment research. In addition research analysts’ reporting lines are structured so as to avoid any conflict of interests. For example, research analysts cannot be subject to the supervision or control of anyone in the Standard Bank Group’s investment banking or sales and trading departments. However, such sales and trading departments may trade, as principal, on the basis of the research analyst’s published research. Therefore, the proprietary interests of those sales and trading departments may conflict with your interests.
Legal Entities
To U. S. Residents
Standard New York Securities, Inc. is registered with the Securities and Exchange Commission as a broker-dealer and is also a member of the FINRA and SIPC. Standard Americas, Inc is registered as a commodity trading advisor and a commodity pool operator with the CFTC and is also a member of the NFA. Both are affiliates of Standard Bank Plc and Standard Bank of South Africa. Standard New York Securities, Inc is responsible for the dissemination of this research report in the United States. Any recipient of this research in the United States wishing to effect a transaction in any security mentioned herein should do so by contacting Standard New York Securities, Inc.
To South African Residents
The Standard Bank of South Africa Limited (Reg.No.1962/000738/06) is regulated by the South African Reserve Bank and is an Authorised Financial Services Provider.
To U.K. Residents
Standard Bank Plc is authorised and regulated by the Financial Services Authority (register number 124823) and is an affiliate of Standard Bank of South Africa. The information contained herein does not apply to, and should not be relied upon by, retail customers.
To Turkey Residents
Standard Unlu Menkul Degerler A.S. and Standard Unlu Portfoy Yonetimi A.S. are regulated by the Turkish Capital Markets Board (“CMB”). Under the CMB’s legislation, the information, comments and recommendations contained in this report fall outside of the definition of investment advisory services. Investment advisory services are provided under an investment advisory agreement between a client and a brokerage house, a portfolio management company, a bank that does not accept deposits or other capital markets professionals. The comments and recommendations contained in this report are based on the personal opinions of the authors. These opinions might not be appropriate for your financial situation and risk and return preferences. For that reason, investment decisions that rely solely on the information contained in this presentation might not meet your expectations. You should pay necessary discernment, attention and care in order not to experience losses.
To Singapore Residents
Singapore recipients should contact a Singapore financial adviser for any matters arising from this research report.
Important Regional Disclosures
The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company(ies) within the past 12 months.
Principal is not guaranteed in the case of equities because equity prices are variable.
Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that.
To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors:
The non-U.S. research analysts (denoted by an asterisk*) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts (denoted by an asterisk*) may not be associated persons of Standard New York Securities Inc. and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Each analyst (denoted by an asterisk*) is a Non-U.S. Analyst. The analyst is a research analyst employed by The Standard Bank Group Limited.
General
This research report is based on information from sources that Standard Bank Group believes to be reliable. Whilst every care has been taken in preparing this document, no research analyst or member of the Standard Bank Group gives any representation, warranty or undertaking and accepts no responsibility or liability as to the accuracy or completeness of the information set out in this document (except with respect to any disclosures relative to members of the Standard Bank Group and the research analyst’s involvement with any issuer referred to above). All views, opinions and estimates contained in this document may be changed after publication at any time without notice. Past performance is not indicative of future results. The investments and strategies discussed here may not be suitable for all investors or any particular class of investors; if you have any doubts you should consult your investment advisor. The investments discussed may fluctuate in price or value. Changes in rates of exchange may have an adverse effect on the value of investments. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. Members of Standard Bank Group may act as placement agent, advisor or lender, make a market in, or may have been a manager or a co-manager of, the most recent public offering in respect of any investments or issuers referenced in this report. Members of the Standard Bank Group and/or their respective directors and employees may own the investments of any of the issuers discussed herein and may sell them to or buy them from customers on a principal basis. This report is intended solely for clients and prospective clients of members of the Standard Bank Group and is not intended for, and may not be relied on by, retail customers or persons to whom this report may not be provided by law. This report is for information purposes only and may not be reproduced or distributed to any other person without the prior consent of a member of the Standard Bank Group. Unauthorised use or disclosure of this document is strictly prohibited. By accepting this document, you agree to be bound by the foregoing limitations. Copyright 2011 Standard Bank Group. All rights reserved.
Recommended Content
Editors’ Picks
EUR/USD edges lower toward 1.0700 post-US PCE
EUR/USD stays under modest bearish pressure but manages to hold above 1.0700 in the American session on Friday. The US Dollar (USD) gathers strength against its rivals after the stronger-than-forecast PCE inflation data, not allowing the pair to gain traction.
GBP/USD retreats to 1.2500 on renewed USD strength
GBP/USD lost its traction and turned negative on the day near 1.2500. Following the stronger-than-expected PCE inflation readings from the US, the USD stays resilient and makes it difficult for the pair to gather recovery momentum.
Gold struggles to hold above $2,350 following US inflation
Gold turned south and declined toward $2,340, erasing a large portion of its daily gains, as the USD benefited from PCE inflation data. The benchmark 10-year US yield, however, stays in negative territory and helps XAU/USD limit its losses.
Bitcoin Weekly Forecast: BTC’s next breakout could propel it to $80,000 Premium
Bitcoin’s recent price consolidation could be nearing its end as technical indicators and on-chain metrics suggest a potential upward breakout. However, this move would not be straightforward and could punish impatient investors.
Week ahead – Hawkish risk as Fed and NFP on tap, Eurozone data eyed too
Fed meets on Wednesday as US inflation stays elevated. Will Friday’s jobs report bring relief or more angst for the markets? Eurozone flash GDP and CPI numbers in focus for the Euro.