The rand pushed through the 13.00 level this morning, briefly touching 14.00 against the dollar. It is currently just above 13.30; the market will be looking at 13.50 for support.
Markets have gone into risk-aversion mode, with global equities and commodities under pressure. Risk aversion is clear from the VIX Index which jumped from 20% to 28% on Friday – a level last seen in October 2014. We expect further volatility as concerns over EM markets grow.
Asian equity markets have had a bad start to the week. At time of writing, the Shanghai Composite was down 8.45%, effectively giving up all its gains for the year. This index was up more than 63% for the year just three months ago.
Risk aversion will likely spill over into US trading later today, with the US equity futures also taking a hit this morning. The S&P and Dow Jones futures contract for September are both down 3%.
It’s a busy week on the domestic front. The SARB’s leading indicator for June is scheduled for release tomorrow at 09h00. Mining production data for June, due out on Tuesday, is expected to have increased to 3.1% y/y from 2.7% y/y in May.
Stats SA’s release of GDP data for Q2:15 is scheduled for Tuesday at 11h30. GDP growth is expected to have slipped to 2.0% y/y, from 2.1% y/y in Q1:15. Standard Bank expects growth of 2.9% y/y for Q2:15.
International developments
This morning, the rand pushed through the 13.00 level, touching 14.00 against the dollar. The currency is currently trading just above 13.30, and the market will be looking at the 13.50 level for support. A close above this number could set up the rand for further weakness.
Markets have gone into risk-aversion mode, with global equities and commodities under pressure. Risk aversion is clear from the VIX index which jumped from 20% to 28% on Friday – a level last seen in October 2014. Overall we would expect volatility to remain in place as concerns over EM markets grow. While EM currencies are taking a blow, we would expect local SA yields also to remain on the back foot today despite USTs finding good support. The UST 10y yield has strengthened to 2% after trading at 2.5% less than three months ago.
Asian equity markets have had a bad start to the week. At time of writing, the Shanghai Composite was down 8.45%, effectively giving up all its gains for the year. This comes after the Shanghai Composite Index was up more than 63% for the year just over three months ago. Also this morning, the Shenzhen Composite was down 7.6%, the Japanese Nikkei was down 4.6%, and the Hong Kong Hang Seng was down 4.6%. All eyes will be on the People’s Bank of China to see what steps they might take to stem the rout and whether there may be further renminbi devaluation. As mentioned last week, we are left with little doubt that further devaluation of the RMB would be rand-negative (see our report When China devalues dated 17 Aug’15). Although these moves in the rand would be consistent with the trend in our FX forecasts, today’s substantial weakness is unexpected. We expected the rand to weaken towards 13.50 only towards the middle of next year (for more detail on our FX forecasts see our report FX Weekly: Rand weaker as cyclical drivers and EM support wane dated 12 Aug’15).
It seems that risk aversion will spill over into US trading later today, with the US equity futures also taking a hit this morning. The S&P and Dow Jones futures contract for September are both down 3%.
Although markets will be on edge, data-wise it is set to be a quiet day on the international front, with no major data releases due in the US, EU or China.
Local developments
It’s a busy week on the domestic front. The SARB’s leading indicator for June is scheduled for release tomorrow at 09h00. A further slippage in the index is anticipated from 93.4 pts in May. Stats SA also releases the mining production data for June tomorrow at 11h00. Bloomberg consensus pencils in an increase in mining output to 3.1% y/y from 2.7% y/y in May. The range is quite wide, with a low of -2.5% y/y, and a high of 7.4% y/y expected. Our SBGS economists expect mining output to have increased by 3.0% y/y. June is a seasonally stronger month; they therefore think that mining is likely to continue benefiting from positive base effects on the back of the strikes in PGM sector which spanned January to June 2014. Furthermore, favourable base effects are likely to continue into the beginning of Q4:15 as mining companies would have taken around three to four months to begin producing at full capacity again.
On a m/m basis, mining production is expected to have remained in negative territory, albeit improving from May’s massive decline of 4.7%. A decline of 0.7% is expected for June.
Stats SA’s release of the GDP data for Q2:15 is also scheduled for Tuesday at 11h30. GDP growth is expected to have slipped in Q2:15 to 2.0% y/y from 2.1% y/y in Q1:15. Standard Bank expects growth of 2.9% y/y for Q2:15. On an annualised q/q basis, GDP growth is expected to have fallen further to 0.7% from 1.3% in Q1:15.
Lastly, Stats SA releases the July PPI print on Thursday at 11:30. Bloomberg consensus is pencilling in an increase to 3.8% y/y in July from 3.7% y/y in June.
Markets
The rand weakened on Friday, edging closer to 13.00, then closing at 12.97, compared to Thursday’s close of 12.94. The rand’s depreciation against the greenback occurred despite dollar weakness against all of the major currencies; the dollar posted losses against the euro (1.3%), the yen (-1.1%) and marginally against the pound. The rand weakened against all of the major crosses; the rand lost ground against the euro (1.6%), the yen (-1.4%) and the pound (0.3%). The rand put in the second-worst performance amongst the commodity currencies we monitor for purposes of this report, only ahead of the CAD and put in the third-best performance amongst the EM currencies, behind the HUF and TRY. The rand traded between a low of USDZAR12.8879 and a high of USDZAR12.9859.
Commodity prices were mixed on Friday. Gold was up on Friday, by 0.8%, while copper and platinum were down by 1.3% and 1.2% respectively. Brent closed the day 2.5% lower, at $45.46/bbl. Both the developed world MSCI and MSCI EM were down on Friday, by 2.7% and 2.2% respectively. The ALSI was down by 1.5% on the day. Non-residents were net sellers (ZAR482 billion) of equities. The EMBI spread widened on Friday, by 8 bps, and SA’s 5yr CDS widened by 10 bps. The CBOE VIX Index, a volatility-based proxy for global risk appetite/aversion, increased by 45.5%.
Latest SA publications
SA Credit & Securitisation Flash Note: Robust ACSA FY:15 results — but regulatory concerns linger by Steffen Kriel (20 August 2015)
SA Macroeconomics: Eskom Holdings SOC Ltd: Fragile liquidity position by Steffen Kriel and Kim Silberman (18 August 2015)
SA Credit & Securitisation Flash Note: Eskom Holdings SOC Ltd by Steffen Kriel and Kim Silberman (18 August 2015)
SA Macroeconomics: SA's terms of trade under increasing pressure in 2H2015 : We consider SA's TOT under 3 commodity price scenarios by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (18 August 2015)
SA FIC Weekly: When China devalues by Walter de Wet, Shireen Darmalingam and Penny Driver (17 August 2015)
SA Macroeconomics: We revise our commodity price and currency outlook: Risks to commodity prices lie to the downside & we adjust our ZAR forecast weaker by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (13 August 2015)
SA FX Weekly: Rand weaker as cyclical drivers and EM support wane by Walter de Wet, Shireen Darmalingam and Penny Driver (12 August 2015)
SA Macroeconomics: June manufacturing -0.4% y/y: Q2 contracts -4.9% q/q saar, sending the sector into recession by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (11 August 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
USD/JPY holds positive ground around 151.50 following Japanese CPI data
The USD/JPY pair holds positive ground for the second consecutive day near 151.45 on Friday during the early Asian trading hours. The cautious approach from the Bank of Japan to keep monetary conditions accommodative exerts some selling pressure on the Japanese Yen.
AUD/USD depreciates on risk aversion amid a stronger US Dollar
AUD/USD extends its losses for the second successive session on Friday. However, market activity is expected to be subdued due to light trading on Good Friday. Meanwhile, the US Dollar strengthens as recent data indicates annualized economic expansion in the United States, driven by consumer spending.
Gold price finishes Thursday’s session set to reach new all-time highs
Gold price rallied during the North American session on Thursday and hit a new all-time high of $2,225 in the mid-North American session. Precious metal prices are trending higher even though US Treasury yields are advancing, underpinning the Greenback.
Top 3 Price Prediction BTC, ETH, XRP: Retail watches from the sidelines with a bias for shorts
Bitcoin is showing strength as markets head into the Easter holidays. As it rises, altcoins are following suit, with Ethereum and Ripple posting almost similar gains. Meanwhile, there remains an unfilled CME Gap, with a lot of liquidity also resting above and below BTC price.
Bears have been standing before a steamroller so far this year
Despite a pushback on rate cuts from Christopher Waller, and what was supposed to be cautious trading sentiment ahead of critical US inflation data released later on Friday, the S&P 500 rose on Thursday, marking its best first-quarter performance in five years.