Standard Bank Research Team
Standard Bank
This week will see the Fed FOMC meet to decide on the monetary policy stance of the US. A rate hike by year-end is still being priced. Concerns over a US rate hike continue to keep EM currencies, including the rand, on the back foot.
As of Friday last week, the Fed fund futures were pricing only a small chance of a hike at this week’s meeting, with a steadily rising chance of a hike in September and December.
Equity markets remain under pressure. Most major indices in Asia are in the red during early morning trade following the decline in the S&P and Dow in the US on Friday.
Bonds in general are benefiting from growth concerns and lower commodity prices. The UST 10-year bond yield declined marginally to 2.26% on Friday, while German bunds were also in demand. This provided some stability to local SA bonds despite the sell-off in the rand.
A busy week on the local front kicks off with the SARB’s release of the M3 money supply and private sector credit extension on Wednesday at 08h00. Money supply is expected to have increased to 8.55% y/y in June from 8.37% y/y in May. Private sector credit extension, however, is expected to have slipped to 9.29% y/y in June from 9.53% y/y in May.
On Friday, all eyes will be on the June trade data which is due for release at 14h00. Bloomberg consensus expectations are for the trade balance to remain in surplus territory at ZAR3.6bn from ZAR5.0bn in May. Standard Bank expects the trade surplus to have moderated to ZAR4.4bn in June.
The rand weakened on Friday, closing at 12.66, compared to Thursday’s close of 12.45. USDZAR support is at 12.5500 and 12.4050, while resistance is at 12.6300 and 12.700.
International developments
This week will see the Fed FOMC meet to decide on the monetary policy stance of the US. A rate hike by year-end is still being priced. Concerns over a US rate hike continue to keep EM currencies, including the rand, on the back foot.
As of Friday last week, the Fed fund futures were pricing only a small chance of a hike at this week’s meeting, with a steadily rising chance of a hike in September and December. Over the next 12 months, Fed fund futures are pricing two 25 bps hikes.
Although we believe that the rand weakness seen since last week Thursday may be slightly overdone, the cyclical underpin for the rand remains far from reliable. Oil slid below USD55/bbl on Friday. However, the fall in oil prices has not occurred in isolation. The latest decline in the oil price has coincided with an even larger decline in South Africa’s major commodity export prices. This is unlike the price moves in Q4:14 and Q1:15 when the prices of SA’s major commodity exports (gold, platinum, iron ore and coal) held up relatively well compared to the price decline of crude oil. Gold, platinum, iron ore and coal prices are also under pressure, with the gold price just below USD1,100 and platinum just below USD990. With a stronger dollar and lower oil prices dragging all commodities lower, the cyclical underpin for the rand remains far from reliable.
Equity markets remain under pressure. Most major indices in Asia are in the red during early morning trade following the decline in the S&P and Dow in the US on Friday. The S&P and Dow closed -1.07% and -0.92% lower respectively. The Shanghai Composite is down -2.4% so far this morning, while the Nikkei is down -1.08%. Risk aversion in major markets could be a drag on the rand.
Bonds in general are benefiting from growth concerns and lower commodity prices. The UST 10-year bond yield has declined marginally to 2.26% on Friday, while German bunds were also in demand. This provided some stability to local SA bonds despite the sell-off in the rand.
USDZAR support is at 12.5500 and 12.4050, while resistance is at 12.6300 and 12.700.
Local developments
A busy week on the local front kicks off with the SARB’s release of the M3 money supply and private sector credit extension on Wednesday at 08h00. Money supply is expected to have increased to 8.55% y/y in June from 8.37% y/y in May. Private sector credit extension, however, is expected to have slipped to 9.29% y/y in June from 9.53% y/y in May. Stats SA releases the unemployment data for Q2:15 on the same day at 13h00. The unemployment rate, which has oscillated around the 25% mark since 2010, increased to 26.4% in Q1:15. Bloomberg consensus expectations pencil in a further increase in the unemployment rate to 26.5%.
Stats SA’s PPI data is scheduled for release on Thursday at 11h30. According to Bloomberg consensus, PPI is expected to have increased to 3.9% y/y in June from 3.6% y/y. On a m/m basis, however, PPI is expected to have slipped to 0.6% in June from 0.8% y/y in May.
On Friday, all eyes will be on the June trade data which is due for release at 14h00. Bloomberg consensus expectations are for the trade balance to remain in surplus territory at ZAR3.6bn from ZAR5.0bn in May. Standard Bank expects the trade surplus to have moderated to ZAR4.4bn in June. SBGS economist, Kim Silberman, notes that the forecast assumes a 2.5% m/m contraction in the volume of non-mineral imports, in line with an estimated 4.4%m/m contraction in non-mineral import volumes in May. She further notes that the fall in global commodity prices is net negative for SA’s terms of trade. SA’s commodity exports account for between 55% and 60% of total exports whereas commodity imports account for between 20% and 25% of total imports.
Kim points out that weak domestic demand is having a contractionary effect on imports such that non-mineral imports have contracted month-on-month for 3 of the 5 months YTD. Due to base effects, the volumes of commodity exports that were affected by strikes last year are growing at over 10% y/y. In addition, vehicle exports are also experiencing positive base effects as a result of the 1H2014 Mercedes Benz factory shut down and the subsequent upgrade which has increased export capacity in 2015. Nonetheless, electricity shortages and load shedding continue to constrain exports, particularly manufacturing sector exports.
Markets
The rand weakened on Friday, closing at 12.66, compared to Thursday’s close of 12.45. The rand’s depreciation against the greenback occurred despite dollar weakness against some of the major currencies; the dollar posted losses against the yen (-0.1%), and against the euro, but gained ground, albeit marginally, against the pound. The rand lost ground against all of the major crosses; the yen (-1.4%), the euro (1.3%) and the pound (1.3%). The rand put in the worst performance amongst the commodity currencies we monitor for purposes of this report, and put in the second-worst performance amongst the EM currencies, only ahead of the BRL. The rand traded between a low of USDZAR12.4268 and a high of USDZAR12.7041.
Commodity prices were mixed on Friday. Platinum and gold were up on Friday, by 1.1% and 0.8% respectively. Copper was down by 0.2% on the day. Brent closed the day 1.2% lower, at $54.62/bbl. Both the developed world MSCI and MSCI EM were down further on Friday, by 1.0% and 1.4% respectively. The ALSI was down by 1.7% on the day. Non-residents were net sellers (-ZAR562 million) of equities on Friday. The EMBI spread widened by 3 bps on Friday, and SA’s 5yr CDS widened by 4 bps. The CBOE VIX Index, a volatility-based proxy for global risk appetite/aversion, increased by 8.7%.
Latest SA publications
SA FIC Weekly: Despite the oil price decline, the cyclical underpin for the rand is still far from reliable by Walter de Wet and Shireen Darmalingam (27 July 2015)
SA FIC: The SARB: still hawkish, but more dovish by Walter de Wet (23 July 2015)
SA Macroeconomics: SARB hikes repo 25bps to 6.0%: Statement supportive of our view for rates on hold until 2H:2016 by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (23 July 2015)
SA FIC Trade Idea: Time to revisit the receiver trade by Walter de Wet (23 July 2015)
SA Macroeconomics: May CPI rises to 4.7% y/y: Core falls to 5.5%, food to 4.3% by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (22 July 2015)
SA Macroeconomics: MPC to hike & CPI to rise: Net inflows to EMs over the past week: SA receives lion's share of equity inflows & debt outflows by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (20 July 2015)
SA FIC Weekly: A 25 bps hike and then a pause by Walter de Wet and Shireen Darmalingam (20 July 2015)
Credit & Securitisation Flash Note: Transnet SOC Ltd by Steffen Kriel (17 July 2015)
Credit & Securitisation Weekly: Another Transnet secondee to Eskom by Steffen Kriel and Varushka Singh (17 July 2015)
SA Macroeconomics: May retail sales growth 2.4% y/y down from 3.4% in Apr: General dealers slowed 2.3% y/y by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (15 July 2015)
SA Macroeconomics: Greece reaches a deal, China opens stronger, Oil falls to $56.5: SA consumption expected to slow by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (13 July 2015)
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 rises toward 1.0700 after Germany PMI data
EUR/USD gains traction and rises toward 1.0700 in the early European session on Monday. HCOB Composite PMI in Germany improved to 50.5 in April from 47.7 in March, providing a boost to the Euro. Focus shifts Eurozone and US PMI readings.
GBP/USD eases below 1.2350, UK PMIs eyed
GBP/USD is dropping below 1.2350 in the European session, as the US Dollar sees fresh buying interest on tepid risk sentiment. The further downside in the pair could remain capped, as traders await the UK PMI reports for fresh trading impetus.
Gold price flirts with $2,300 amid receding safe-haven demand, reduced Fed rate cut bets
Gold price (XAU/USD) remains under heavy selling pressure for the second straight day on Tuesday and languishes near its lowest level in over two weeks, around the $2,300 mark heading into the European session.
PENDLE price soars 10% after Arthur Hayes’ optimism on Pendle derivative exchange
Pendle is among the top performers in the cryptocurrency market today, posting double-digit gains. Its peers in the altcoin space are not as forthcoming even as the market enjoys bullish sentiment inspired by Bitcoin price.
Focus on April PMIs today
In the euro area, focus today will be on the euro area PMIs for April. The previous months' PMIs have shown a return of the two-speed economy with the service sector in expansionary territory and manufacturing sector stuck in contraction.