Global bond rout continues; rand steady for now

• Globally, bonds being under pressure is still the focal point. The sell-off in bonds, led by German and US bonds, has also put pressure on South African bonds.

• Yesterday, the US 10-year bond yield was sitting at its 200-day MA, currently at 2.1875% — a level above which it has failed to break since May 2013.

• While the ADP employment data broadly follows the same trend as US non-farm payrolls data (which is due for release on Friday and a key data print), the two series can differ greatly on a monthly basis. Therefore, the market took note of the data print but is wary ahead of Friday’s number.

• The rand remains surprisingly steady around the 12.00 level. We maintain that the rand will find it difficult to strengthen on a sustainable basis in an environment where international bond markets are under pressure and domestic fundamentals for the rand are weak.

• On the commodity front, our Asia economist reported this morning that some of the stimulus pushed by the PBoC in recent months might start to feed into the Chinese property sector.

• Locally, the BER released its consumer confidence index yesterday at noon. Consumer confidence declined in Q1:15. We expect consumer sentiment to be held ransom by continued load-shedding across the country and concerns that the power utility is unable to supply power to the grid on a sustainable basis.

International developments

Globally, the attention is still on bonds that remain under pressure. The sell-off in bonds, led by German and US bonds has also put pressure on South African bonds. The rand remains surprisingly steady around the 12.00 level. We maintain that the rand will find it difficult to strengthen on a sustainable basis in an environment where international bond markets are under pressure and domestic fundamentals for the rand are weak.

Yesterday saw the release of US ADP employment data for April. The data disappointed, coming in at 169K jobs created, against consensus for a print of 200K. This is also lower than the revised estimate for March at 175K. While the ADP employment data broadly follows the same trend as US non-farm payrolls data (which is due for release on Friday and a key data print), the two series can differ greatly on a monthly basis. As a result, the market took note of the data print but remains weary of Fridays’ number. A strong data print here may add further fuel to the US bond sell off and put depreciation pressure, which has been largely absent this week, on the rand. Bloomberg consensus estimate is for a print of 230K, up from 126K in March.

We noted yesterday that the US 10-year bond yield was sitting at its 200-day MA currently at 2.1875% — a level above which it has failed to break since May 2013. The 10-year bond yield has broken above this resistance level yesterday and is now trading at 2.2323%. The 200-day MA tends to be a strong technical support or resistance level for momentum traders. Back in May 2013 after the 10-year bond yield broke above the 200 day MA, the bond yield moved from 1.75% to a high of 3.0% in Sep 2013, before starting a decline once again. Ultimately, the bond market should be driven by underlying fundamentals, but momentum trades can push markets around for a while before fundaments kick in again.

Brent crude prices have settled for now with the front month contract trading at USD67/bbl. Other commodities have also been doing well such as copper and iron ore which have bounced over the past few weeks from either multi-month or multi-year lows. The stronger commodity prices are perhaps one aspect within the global environment which is lending support to the rand.

On the commodity front, our Asia economist reported this morning that some of the stimulus pushed by the PBoC in recent months might start to feed into the Chinese property sector. The soft underbelly of China’s economy is firming up — at least in first- and second-tier cities — but we remain cautious. Essentially, a coordinated plan from the central government to place a floor under the market is underway. For the rand, which ultimately remains a commodity currency, an improved property sector in China, should add some support at the margin.

Local developments

Locally it remains quiet. The BER released its consumer confidence index yesterday at noon. The Q1:15 BCI was expected to have slipped into negative territory with Bloomberg consensus expectations pencilling in -1 pts from 0 pts in the final quarter of 2014. In the event, consumer confidence declined even further, to -4 pts in Q1:15. Consumer confidence in Q4:14 was supported by a substantial decline in the petrol price, together with a moderation in food inflation and a recovery in incomes during the period. Q1:15’s decline in the index was driven by the decline in both the financial positions of consumers as well as the time to buy durable goods sub-indices. Economic prospects have also weakened noticeably on the back of load-shedding concerns. This, together with tax hikes announced in the February budget and the risks associated with the xenophobia, will weigh on consumer confidence in the coming quarters. In addition, expectations of tighter monetary conditions will go a long way in denting sentiment. We further expect consumer sentiment to be held ransom by continued load-shedding across the country and concerns that the power utility is unable to supply power on a sustainable basis.

Markets

The rand weakened on Wednesday, closing at 12.02, compared to Tuesday’s close of 11.95. The rand’s depreciation against the greenback occurred despite dollar weakness against all of the major currencies; the dollar posted the largest losses against the euro (1.5%), the pound (0.4%) and the yen (-0.3%). The rand lost ground against all of the major crosses; the euro (1.8%), the pound (0.7%) and the yen (-0.6%). The rand put in the second-worst performance amongst both the commodity currencies and EM currencies we monitor for purposes of this report, only ahead of the NZD (commodities) and the RUB (EMs). The rand traded between a low of USDZAR11.9164 and a high of USDZAR12.0650 intraday.

Metal prices were down on Wednesday. Copper was down by 1.4%, while gold and platinum were both down by 0.1%. The price of Brent closed 0.4% higher at $67.77/bbl. The developed world MSCI was down marginally on the day, while the MSCI EM was down by 0.7%. The ALSI was down by 1.4% on Wednesday. Non-residents were net sellers of equities (-ZAR574 million) on the day. The EMBI spread narrowed by 4 bps and SA’s 5yr CDS narrowed by 3 bps. The CBOE VIX Index, a volatility-based proxy for global risk appetite/aversion, increased by 5.9%.

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