Standard Bank Research Team
Standard Bank
FX
The start of the FOMC’s two-day meeting today is likely to be enough to keep investors’ heads down. The economic calendar is still somewhat interesting, but Steve Barrow (our G10 FIC Strategist) suspects that markets will bide their time until the Fed tomorrow. US durable goods data will be released today. Steve notes that, after a great deal of volatility recently, such as the 18.2% m/m (sa) slump in August, the chances of the market consensus being spot-on with its 0.5% m/m for September are pretty slim. As ever, the non-transport forecast should be a little easier and, here too, the market is looking for a 0.5% m/m rise, albeit after a much more sedate 0.7% m/m rise in August. Steve’s view is that the headline rate could be a bit stronger than the consensus, and the core rate slightly lower. The Conference Board measure for US consumer confidence later in the day may prove a bit easier to forecast. Confidence around job prospects should be good, but the slump in stocks leads Steve to believe that the 87.0 consensus call could be too high. The September reading was 86.0.
Yesterday’s German IFO survey results disappointed market expectations, coming in at 103.2. Consensus had the reading pegged at 104.5, slightly lower than September’s 104.7. Both the current conditions and expectations indicators were softer than the consensus. Eurozone money and credit data for September was a bit better, with M3 rising 2.5% y/y and the three-month average y/y change at 2.1%. But private sector loans were down again, falling 1.2% y/y. In all, the data was not great, but it seems that the market was more preoccupied getting its head around the ECB's stress test results than the economic data. The market appears to have reacted positively to the stress test results, although there are still concerns regarding Italy in particular. The expectation is that Eurozone banks might now begin to lend more freely – a drop in bank lending has added to the headwinds that the region’s economy has faced. However, Capital Economics cautions that bank lending might not recover as strongly as some might be expecting, as demand for loans remains extremely weak.
The rand weakened slightly against the US dollar yesterday after three consecutive days of strength, closing at USDZAR10.94, compared with Friday’s close of USDZAR10.93. Rand depreciation against the greenback occurred despite dollar weakness against all of the major crosses, but was consistent with a mostly weaker performance from the EM currencies we monitor for purposes of this report. The biggest move in the dollar against the major crosses was seen against the yen (-0.3%). The rand weakened against all of the major crosses, with the biggest move logically seen against the yen (-0.4%). Commodity currencies we monitor were mixed on the day. The NZD and AUD appreciated, while the ZAR and CAD depreciated; the NOK was unchanged. All but two of the EM currencies we monitor for the purposes of this report depreciated on the day. The exceptions were the MXN and TRY, both of which appreciated. The rand was the second-worst-performing currency in the commodity currency category (beating only the CAD) and took up the middle position in the EM currency category. The rand traded between a low of USDZAR10.9213 and a high of USDZAR10.9921 intraday. Support from where the rand opened this morning sits at 10.9130, 10.8000 and 10.7500. Resistance levels sit at 11.0100, 11.1650, 11.2450 and 11.3100.
Commodity price moves were mixed. Platinum and copper both rose by 0.6%; gold and Brent meanwhile both fell by 0.4%. The developed market MSCI fell by 0.1% and the EM MSCI by 0.7%. The ALSI meanwhile rose by 0.3%. The EMBI spread widened by 0.5 of a bp, but SA’s 5yr CDS spread compressed by 1 bp. The CBOE VIX index, a volatility based proxy for global risk appetite/aversion, fell by 0.5%.
Non-residents were mild net sellers of local equities (-ZAR146 million) but were net buyers of local bonds (ZAR476 million) on the day. Buying was seen in the 3-7 (ZAR338 million) and 1-3 (ZAR269 million) year segments. Selling of bonds meanwhile occurred in the 12+ (-ZAR101 million) and 7-12 (-ZAR29 million) year buckets. Bond yields rose on the day by between 2 bps (R214) and 3 bps (R203, R208 and R186). The 3x6 and 6x9 FRAs both rose by 2 bps, and the 12x15 FRA rose by 4 bps.
FI
Today’s auction sees ZAR800m of R2030, ZAR800m of R2032 and R750m of R2048 on offer, a repeat of last week’s auction. The average tenor of the bonds on offer is 22.04 years. On a weighted basis, the upcoming auction has an average maturity of 21.80 years. We could see decent demand at the auction, to secure the non-competitive option over Wednesday’s FOMC. However, we expect little actual market movement today, with the currency fairly stable in early morning trade and the R186 opening up still below 8.00%.
Turnover was recorded at ZAR15.7bn in nominal SAGBs yesterday, with the R186 accounting for an unusually low 25.8% of turnover. Significant contribution came from the R207 (21.7%) and R204 (16.6%). The entire curve shifted slightly higher, generally by 2.0 – 3.0 bps, with the R186 leading the moves higher. FRAs followed a similar pattern, moving 2 – 4 bps higher. Non-residents were net buyers of +ZAR476m of nominal SAGBs. Foreign buying was recorded at the short-end in the 1-3 year (+ZAR269m) and 3-7 year (+ZAR338m) segments, while net selling occurred in the 7-12 year and 12+ year (-ZAR101m) segments. In the 1-3 year segment, notable net buying was recorded in the R203 (+ZAR244m). In the 3-7 year segment, net buying in the R207 (+ZAR387m) and the R208 (+ZAR378m), was partially offset by net selling in the R204 (-ZAR426m). In the 12+ year segment, net buying in the R213 (+ZAR331m) and the R2048 (+ZAR110m) was offset by net selling in the R2030 (-ZAR188m), R214 (-ZAR133m) and R2032 (-ZAR108m).
Finance Minister Nhlanhla Nene spoke about rating agencies yesterday. Government is expected to meet with the agencies during November to discuss how revenue will increase while growth is slow, as well as clarify some issues on the spending cuts. S&P and Fitch are scheduled to next release rating reports on the sovereign on 12 December.
US Treasuries continued to strengthen yesterday as yields fell across the curve. The 2yr UST fell by under 0.50 of a bp to a yield of 0.38% and the yield on the 5yr UST fell by 0.83 of a bp to 1.49%. At the longer-end, the 10yr UST fell by 0.80 of a bp to a yield of 2.26% and the 30yr note fell by 0.55 of a bp to a yield of 3.04%.
EM FI markets sold off on balance yesterday. 5yr local currency sovereign yields rose by an average of 1.36 bps and 10yr yields rose by an average of 5.27 bps. SA’s 5yr yield performed worse compared with its EM peers, with the yield rising by 3.20 bps, more than the EM average. This was behind weaker moves recorded in Russia (+6.86 bps) and Thailand (+6.10 bps). In contrast, Mexico (-4.40 bps), India (-3.90 bps) and Indonesia (-1.00 bp) recorded the best moves yesterday. SA’s 10yr note rose by 3.10 bps, outperforming the EM average move. This was behind a substantially weaker move in Brazil (+41.40 bps) and a more moderate move in Russia’s 10yr note (+5.26 bps). In this longer-dated space, the best performing bonds were in India (-3.90 bps), Mexico (-2.30 bps) and China (-1.00 bp).
EM currencies generally depreciated against the US dollar yesterday. The exceptions were the Mexican peso, which appreciated by 0.15% and the Turkish lira, which appreciated by 0.11%. The moves weaker were led by the Brazilian real, which depreciated by 1.91%. The Russian ruble depreciated by 1.11%. Other EM currencies to depreciate marginally yesterday, were the Indonesian rupiah (0.33%), Thai baht (0.10%), SA rand (0.09%), Polish zloty (0.07%), Hungarian forint (0.06%) and Indian rupee (0.04%).
Hungary’s central bank will conclude its monetary policy meeting today. The Bloomberg consensus forecast is for an unchanged central bank rate of 2.10%.
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