Some risk appetite returns

Markets across the board have rallied this morning, tracking US equity markets. The S&P index made its greatest one-day gain since November 2011, moving up 3.9%, while the Dow Jones moved up almost 4%.
Increased risk appetite may push the rand to test 13.00 again today. However, this level is likely to remain key support for the USDZAR. The rand traded between a low of USDZAR13.0376 and a high of USDZAR13.1996 yesterday.
US equity markets have rallied, supported by comments from FOMC member William Dudley – the head of the New York branch of the Fed – who indicated that the Fed was unlikely to hike rates in September. He said that the argument for tightening monetary policy in September seemed “less compelling to me [now] than it was a few weeks ago”.
The SA government, mining companies and labour unions have committed to an agreement to improve productivity, promote investment and save jobs in the sector. Significantly, it was agreed that SA would endeavour to promote platinum as a reserve metal. Chief amongst the steps agreed on was that mines would sell off distressed assets rather than shutting them down.
While at the margin this may be rand-positive, we would not expect the agreement to have any meaningful impact on markets.
It’s a quiet day today, with Stats SA releasing the July PPI print at 11h30. Bloomberg consensus pencils in an increase to 3.8% y/y in July from 3.7% y/y in June.

International developments

The world continues to watch equity markets closely. After another decline of 1.3% in the Shanghai Composite Index yesterday, all major European equity indices also closed in the red. However, US markets finally managed to turn sentiment around yesterday afternoon.

Markets across the board have rallied this morning, tracking US equity markets. At time of writing, the Shanghai Composite was up 1.7%, the Shenzhen Composite was up 1.4%, the Japanese Nikkei was up 1.5%, and the Hong Kong Hang Seng was up 2.3%.

The increased risk appetite may push the rand to test 13.00 again today. However, this level is likely to remain key support for the USDZAR. A rand that strengthens towards 13.00, or even stabilises around the current 13.10 level, should also provide support for local bonds after the weak GDP print earlier this week.

US equity markets have rallied, supported by comments from FOMC member William Dudley – the head of the New York branch of the Fed – who indicated that the Fed was unlikely to hike rates in September. He said that the argument for tightening monetary policy in September seemed “less compelling to me [now] than it was a few weeks ago”. He did temper his comment by adding that new data may make raising rates in September “more compelling.” Dudley further suggested that he would like to see rates hiked this year, as did Dennis Lockhart, the president of the Atlanta Fed. This strengthens our expectations for a rate hike in December. Interestingly the Fed fund futures for the December meeting has dropped since the start of the week, now sitting at 0.25%, implying a slightly less than 50% chance of a rate hike in December. Fed fund futures now seem to price almost no chance of a rate hike in September.

It is worth noting that the S&P index made its greatest one-day gain since November 2011, moving up 3.9%, while the Dow Jones moved up almost 4%. The VIX has fallen 16%, but still remains 10 points above 20, which is seen as the level below which investors are no longer uneasy.

Keep in mind: although markets are up for the day, they are all still down for the week on average. So although there has been a break in the downturn, we remain cautious.

In the bond markets, we are seeing yields creeping slightly higher again, with the 10-year UST yield now at 2.14%. German bonds also traded slightly weaker. Normally we would view higher UST yields as negative for local bond yields. But given the extreme risk aversion earlier this week that accompanied lower bond yields in the US, slightly higher UST yields would be an indication that risk aversion has decreased marginally (as is clear from the decline in the VIX index).

Local developments

Following weeks of wage negotiations and news that gold companies are to embark on job-shedding, the SA government, mining companies and labour unions have agreed on a commitment to improve productivity, promote investment and to save jobs in the sector. Significantly, it was agreed that SA would endeavour to promote platinum as a reserve metal, like gold, while the government will also engage closely with its BRIC trading partners on ways and means to raise demand. Also chief amongst the steps agreed on was that mines would sell off distressed assets rather than shutting them down. As far as labour is concerned, the sector would look to rehabilitate mines in order to maintain current employment. The agreement is set to be signed on Monday.

While at the margin this may be rand-positive, we would not expect the agreement to have any meaningful impact on markets.

It’s a quiet day today, with only Stats SA releasing the July PPI print at 11h30. Bloomberg consensus pencils in an increase to 3.8% y/y in July from 3.7% y/y in June.

Markets

The rand strengthened further on Wednesday, closing at 13.13, compared to Tuesday’s close of 13.20. The rand’s appreciation against the greenback occurred despite dollar strength against all of the major currencies; the dollar posted gains against the euro (-1.8%), the pound (-1.4%) and the yen (0.9%). The rand strengthened against all of the major crosses; the rand gained ground against the euro (-2.3%), the pound (-1.9%) and the yen (1.4%). The rand put in the best performance amongst the commodity currencies we monitor for purposes of this report, and put in the third-best performance amongst the EM currencies, only behind the MXN and BRL. The rand traded between a low of USDZAR13.0376 and a high of USDZAR13.1996.

Commodity prices were mixed on Wednesday. Copper and gold were down on Wednesday, by 2.6% and 1.3% respectively, while platinum was up 0.5% on the day. Brent closed the day 0.2% lower, at $43.14/bbl. The developed world MSCI was up by 2.1% on Wednesday, while the MSCI EM was down by 0.2% on the day. The ALSI was down by 1.3%. Non-residents were net sellers (ZAR1.174 billion) of equities on the day. The EMBI spread narrowed on Wednesday, by 4 bps, and SA’s 5yr CDS narrowed by 1 bp. The CBOE VIX Index, a volatility-based proxy for global risk appetite/aversion, decreased by 15.8%.

Latest SA publications

SA FIC Trade Idea: SAGBs long-end looks like value by Walter de Wet (26 August 2015)

SA Macroeconomics: Mining grows 4.0% in June: Q2:15 contracts 2.0% q/q by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (25 August 2015)

SA Macroeconomics: SA GDP disappoints, -1.3% q/q: Broad based weakness, agric & trade far worse than expected by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (25 August 2015)

SA FIC Weekly: Yields – when the rand blows, and the SARB is forced to hike by Walter de Wet, Shireen Darmalingam and Penny Driver (24 August 2015)

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)

Share: Analysis feed

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.