Quiet end to a volatile week

The week looks set to end on a quiet note, with US markets closed today. Local markets will likely be range-bound.
On Monday, we will wake up to the Greece referendum results. We would expect the rand to rally to 12.10 should Greece vote to accept a deal from creditors.
US employment data disappointed yesterday, with both the headline numbers and early earnings coming in below expectations. The dollar weakened marginally on the back of the US employment data, and the rand strengthened from 12.35 to 12.25.
We still believe that the Fed will hike in September, but the latest data will keep the market vascillating between September and December.
We look to Tuesday next week when the deadline for negotiations around Iran’s nuclear deal will expire.
Locally, the BER’s measure of consumer confidence surprised on the downside yesterday.
The Standard Bank South Africa PMI (previously known as the HSBC PMI) is due for release today at 09h15. The manufacturing index is expected to have increased, albeit marginally, to 50.3 pts in June from 50.1 pts in May.

International developments

This week started in a volatile fashion on Monday on news that Greece had called a referendum. The week looks set to end on a quiet note, with US markets closed today. Local markets will likely be range-bound.

Next week Monday, we will wake up to Greece referendum results which should start coming through in the early hours of the morning. The Greek Prime Minister is pushing for a no vote – a vote against a deal with creditors. The outcome may provide us with another volatile start to a week. We would expect the rand to rally towards the 12.10 level should the Greeks vote to accept a deal offered by its creditors.

US employment data disappointed yesterday, with both the headline numbers and early earnings coming in below expectations. The change in nonfarm payrolls was 223K in June, below the expected 233K. The May numbers were also adjusted lower from 280K to 254K. Early earnings were flat m/m at 0%, while the expectations were for an increase of 0.2%.

We still believe that the Fed will hike in September, but the latest data will keep the market guessing between September and December. There is of course also a FOMC meeting on 29 July, although a hike at this meeting seems very unlikely. The main interest in this meeting would be the comments by officials after the meeting.

USTs strengthened marginally after the US data release, with the 10-year yield falling from 2.46% to the current 2.38%. The dollar also weakened marginally, with the rand strengthening from 12.35 to 12.25. But overall the market seems to have taken the disappointment in its stride which does perhaps indicate that markets are now closer to fully pricing in a Fed hike this year.

We would also look to Tuesday next week when the deadline for negotiations around Iran’s nuclear deal expires. The self-imposed deadline of 30 June has been pushed back by a week to 7 June. Brent crude remains nervous and is trading just below USD62.00. We would expect crude oil to come under pressure should a deal be struck.

Local developments

The BER’s measure of consumer confidenece surprised on the downside yesterday. The index fell to -15 pts in Q2:15 from -4 pts in Q1:15 and against Bloomberg consensus expectations of -4pts. The BER noted that consumer confidence during the quarter was plagued by social unrest, political turmoil, power outtages and other economic headwinds, which dragged confidence to a 14-year low in Q2:15. All three sub-compoenents of the index declined during the quarter; the financial position fell by 9 pts while the time to buy durable goods declined by 12 pts. Significantly, and the largest driver of the decline in consumer confidence came from consumers’ rating of South Africa’s economic prospects.

The BER noted that “Factors such as increased load-shedding, a further depreciation in the rand exchange rate and the tax hikes and slowdown in government spending announced in the February National Budget already weighed on consumers' rating of the outlook for the domestic economy in 1Q2015. Since the end of March, a barrage of adverse developments has now further dented consumer sentiment regarding South Africa's economic prospects. These include the explosion of xenophobic violence in Durban and Johannesburg in April, an additional 19% increase in the petrol price, higher debt servicing costs and a rising unemployment rate."

The Standard Bank South Africa PMI (previously known as the HSBC PMI) is due for release today at 09h15. The manufacturing index is expected to have increased, albeit marginally, to 50.3 pts in June from 50.1 pts in May. Recall the BER’s June PMI increased to 51.4 pts from 50.8 pts in May.

Markets

The rand was unchanged on Thursday, closing at 12.25, the sames as Wednesday’s close. The rand’s steadiness against the greenback occurred in line with dollar weakness against some of the major currencies; the dollar posted losses against the euro (0.3%) and the yen (-0.2%), but gained ground against the pound (-0.1%). The rand lost ground against some of the major crosses; the euro (-0.3%) and the yen (-0.1%), but gained ground against the pound (-0.1%). The rand put in the second-best performance amongst the commodity currencies we monitor for purposes of this report, only behind the CAD and put in the worst performance amongst the EM currencies. The rand traded between a low of USDZAR12.2332 and a high of USDZAR12.3575.

Commodity prices were mixed on Thursday. Copper and platinum were both up on Thursday, by 0.4% and 0.3% respectively, while gold was down by 0.2% on the day. Brent closed 0.1% higher, at $62.07/bbl. The developed world MSCI was up by 0.7%, while the MSCI EM was down fractionally on the day. The ALSI was up by 0.6% on Thursday. Non-residents were net buyers of equities (ZAR963 million) on Thursday. The EMBI spread narrowed by 1 bp on Thursday, while SA’s 5yr CDS widened marginally. The CBOE VIX Index, a volatility-based proxy for global risk appetite/aversion, increased by 4.4%.

Latest SA publications

SA Macroeconomics: PMI rose from 50.8 to 51.4: Activity & employment improve but new orders decline by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (1 July 2015)

Credit & Securitisation Special Report: African Bank H1:15 results – more of the same by Steffen Kriel (1 July 2015)

SA Macroeconomics: May private credit 9.5% y/y: Corporate credit up 16.2% y/y by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (30 June 2015)

Credit & Securitisation Special Report: NERSA rejects selective reopener in favour of a full reopener & RCA claw-backs by Steffen Kriel and Kim Silberman (30 June 2015)

SA Macroeconomics: NERSA rejects Eskom's re-opener: Implications by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (30 June 2015)

SA Macroeconomics: Nersa decides on tariffs today: Greece to dominate EM assets by Kim Silberman and Steffen Kriel (29 June 2015)

SA FIC Weekly: Eskom, Greece in focus; revised wage deal has important policy implications by Walter de Wet and Shireen Darmalingam (29 June 2015)

Credit & Securitisation Weekly: Crunch time by Steffen Kriel and Varushka Singh (26 June 2015)

Credit & Securitisation: Eskom's selective reopener by Steffen Kriel and Kim Silberman (26 June 2015)

SA Macroeconomics: The timing of Eskom's tariff increase will significantly impact CPI and the MPC's decision: We await NERSA's decision on Monday June 29th by Kim Silberman and Steffen Kriel (26 June 2015)

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