OPEC decision could keep oil low for longer

FX

OPEC has decided to keep output unchanged at 30mbpd. This move looks to rebalance the market, by pushing marginal producers (which in recent years have been shale producers in the US) out of the market, rather than by reducing their crude oil production. The behaviour of OPEC has set the scene for crude oil prices to remain low for longer. The next OPEC meeting is only due on 5 June 2014. Our oil and gas equity analysts believe that the scene is set for crude oil to remain around USD70/bbl for the next six months. The immediate reaction of Brent crude oil yesterday was to drop from just above USD76/bbl before the announcement to below USD72/bbl a few hours later. Currently, the price is drifting around USD72/bbl – a level last seen in 2010. WTI crude, the US benchmark, dropped below USD69/bbl.

With indication that the crude oil market will adjust lower, domestic inflation expectations for 2015 should start to adjust lower. Arguably, the most visible sign of the lower oil price will be seen in a lower petrol price. As of 27 November, the average over recovery so far for the month stood at 79.82 cents/litre (for 95 Octane petrol in Gauteng). The petrol price decrease for December will be announced today. As pointed out yesterday, inflation expectations in the US have already declined substantially since June with the 2-year breakeven inflation, as implied by the bond market, falling from 1.8% in June to 0.71% this morning. The declining oil price should have a positive impact on the trade balance. Oil and oil products constitute around 20% of South African imports and the value of these imports should start to see a marked decline. For now, although gold and platinum have also been under some selling pressure yesterday, these metals have been holding up much better and with gold at USD1,190 and platinum at USD1,220, both remain well within recent trading bands. As a result, exports of precious metals in particular may hold up better, which should, all else being equal, improve South Africa’s trade balance and terms of trade – which would be rand-positive.

On the international data front today, Eurozone CPI data will be a particular focus given that the ever-falling CPI rate, and the imminent threat of deflation, seems to have forced the ECB into more and more easing.

Steve Barrow (our G10 Strategist) notes that at the moment the market probably thinks that the bank will only make minor policy tweaks at next week’s meeting, leaving bigger issues, such as outright quantitative easing, until next year. But he warns that a downside inflation surprise could change all that, although he doesn’t think the data will surprise. Steve suspects that the headline figure will be in line with the 0.3% y/y that forms the Bloomberg consensus – and the 0.7% y/y that makes up the consensus for core prices. Steve notes that in terms of the 41-person survey for headline prices, there’s a skew to the high side, with 10 of the 41 anticipating a number above 0.3% y/y, and just 2 seeing something below the 0.3% y/y consensus. If the numbers are in line with consensus, Steve thinks we could see the euro rise slightly, as the market might go into the data suspecting that the risks are to the downside given the soft national data we saw yesterday. However, Steve points out that euro/dollar seems to be rock steady at around the 1.25 level at the moment and he doesn’t anticipate that CPI data can destroy this calm.

On Monday, we will see the release of manufacturing PMIs from all the major economies. The market will likely have a particular interest in China’s PMI index where expectations are for the index to decline to 50.5 in November from 50.8 in October. Earlier this month, the HSCB flash PMI for China indicated that the Chinese manufacturing sector remained poised between expansion and contraction. Monday’s official number should provide confirmation. A weaker than expected number (especially a fall below 50) could see industrial commodities come under pressure early next week, which could weigh on commodity currencies.

Stats SA released the October PPI numbers yesterday. The October print exceeded expectations (Bloomberg consensus: 6.6%), albeit still moderating to 6.7% y/y from 6.9% y/y in September. PPI has been on a steadily moderating path since reaching a peak of 8.8% y/y in April this year. The slowdown in the headline number was driven by the following categories: food products, beverages and tobacco products, wood and paper products as well as metals, machinery, equipment and computing equipment.

Local money supply and credit extension numbers were released this morning. Money supply grew 8.02% y/y in October, an improvement on September’s revised 7.86% y/y growth (previously, 7.85% y/y), but just short of consensus expectations for a 8.08% y/y increase. Private sector credit extension growth surprised to the upside, coming in at 9.06% y/y in October (Bloomberg consensus: 9.00% y/y), up from 8.74% y/y in September. Buoyancy here stemmed largely from credit extension to corporates, which increased by 15.18% y/y in October, up from 14.26% y/y in September. Growth in credit extension to households moderated to 3.61% y/y in October, from 3.79% y/y in September; this continues a largely weakening trend in place since the end of 2012.

SARS releases the preliminary October trade balance data later today. Expectations are for the trade deficit, which surprised on the upside in September (at -ZAR2.9 billion), to have widened in October. Bloomberg consensus has pegged the deficit at -ZAR6.3 billion in October. Analyst opinions range between a surplus of ZAR1.1 billion and a deficit of -ZAR12.0 billion. We believe that the deficit will narrow to -ZAR2.0 billion. Narrowing of the deficit is expected on the back of an improvement in export volumes in October, as production is ramped up post-industrial action in the manufacturing industry in the preceding months. Should the trade balance print in line with our expectations, we think that this would be supportive of the rand.

The narrowing of the deficit in September occurred due to a stellar increase in export values, which rose by 7.3% m/m from ZAR76.8 billion to ZAR90.8 billion in August. M/m increases were driven by precious metals exports (ZAR4.8 billion) and mineral products (ZAR3.9 billion). Exports of vehicles and transport equipment and chemical products were up by ZAR2.1 billion and ZAR1.0 billion respectively. We think that the ramp-up in mining and manufacturing production following strike activity this year will continue to filter into upcoming trade numbers. On the import front, domestic demand remained fairly resilient in September, with imports increasing by 8.1% on a m/m basis. Imports rose to ZAR803.2 billion in October from ZAR742.9 billion. The increase was led by increases in vegetable products which rose by ZAR1.3 billion. Noticeable declines were seen in the following categories: machinery and electronics, vehicles and transport equipment and equipment components. The forecast for October factors in lower commodity prices with oil prices falling by close to 10% during the month. This should allow for a softening of mineral product imports in October.

The monthly fiscal deficit data has taken on more of an importance, since the MTBPS, as it is the most reliable data to judge whether NT is managing to cut back on its expenditure. The October figure, published today, will be first fiscal figure since the MTBPS and our forecast for the print is -ZAR28.56 billion, worse than the prior month’s -ZAR5.36 billion, which had surprised to the tighter side. The wider deficit in October would be in line with historical trends. Should October print in line with our forecast, it would take the cumulative fiscal year deficit to -R145.71bn, compared to -R140.26bn for the same period last year, or 3.89% wider. The September deficit figures showed that expenditure is running slightly behind last year’s figures and revenue is also behind last year’s figures: at the end of September, revenue raised was 45.2% of the Budget, vs 45.8% at the same time in 2013/14. Expenditure is now 48.3% of the Budget, compared to 48.4% in 2013/14.

The rand weakened against the US dollar on Thursday, closing at USDZAR10.98, compared with Wednesday’s close of USDZAR10.96. Rand depreciation against the dollar, albeit mild, occurred in line with dollar strength against most of the major crosses; the dollar strengthened against the euro and the pound but weakened against the yen. Rand performance against the major crosses was mixed; weakening against the dollar and yen, but strengthening against the pound and the euro. The rand put in the second-worst performance amongst the commodity currencies, ahead of only the NOK. In the EM category, the rand was the third-best, behind the BRL and TRY. The rand traded between a low of USDZAR10.9550 and a high of USDZAR10.9902 intraday. Support from where the rand opened this morning sits at 10.9000, 10.8550, 10.8000 and 10.7500. Resistance levels sit at 11.1000, 11.1650, 11.2450 and 11.3100.

Commodities were down on the day. Platinum fell by 0.9%, while gold was down by 0.6%. Copper fell by 0.2% on the day. Brent declined aggressively by 6.7% as OPEC decided to keep oil production unchanged at the group’s 30 mbpd (million barrels per day) production target. The developed market MSCI was down on Thursday, falling 0.2%, while the MSCI EM was up by 0.1%. The ALSI was in line with the general trend in EM equities, increasing by 0.4%. The EMBI spread narrowed by less than 1 bp, while the SA’s 5yr CDS spread was unchanged. The CBOE VIX index, a volatility-based proxy for global risk appetite/aversion, fell 1.5%.

Non-residents were net buyers of local bonds (ZAR340 million). Buying of bonds was seen in the 3-7 (ZAR241 million), 12+ (ZAR78 million) and 1-3 (ZAR64 million) year segments, while some selling was seen in the 7-12 (-ZAR44 million) year bucket. Bond yields increased by between 1 bp (R208) and 2 bps (R214). Yields on the R203 and R186 were unchanged. The 6x9 FRA fell by 1 bp, the 3x6 and 12x15 FRAs were unchanged.

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