Markets to take their cue from global PMIs

• China’s PMI data was released this morning, coming in at 49.7 pts, from the previous month’s reading of 50.0 pts — falling below 50 into contraction for the first time since February. This was in line with Bloomberg and Reuters forecasts.

• The People’s Bank of China set the reference rate for the renminbi 0.2% stronger this morning in an effort to undo some of the damage done to the currency on the back of the bad PMI data.

• Oil continues to bounce back from the recent lows, with Brent crude oil now trading back at $52.50, from a low of $42.25 slightly more than a week ago. Brent has rallied $9 in three sessions. Yesterday’s rally follows the release of the OPEC Bulletin in which comments were made that the cartel remains committed to an equilibrium price for the oil market and is willing to talk to all parties in achieving this price.

• The trade balance swung back into deficit territory, recording a marginal deficit of -ZAR0.4 billion in July, while the June numbers were revised down to ZAR5.5 billion (previously ZAR5.8 billion).

• The Barclays Manufacturing PMI data for August is due for release at 11h00 today. Bloomberg consensus pencils in a slippage to 51.1 pts in August from 51.4 pts in July.

• Naamsa’s release of the vehicle sales data today is expected to reflect an industry struggling to make gains. The Bloomberg consensus polls are indicative of yet another y/y contraction of -4.1% in August, from -6.1% y/y in July.

International developments

Today saw the release of the Chinese PMI data, which came in at 49.7 pts from the previous month’s reading of 50.0 pts, falling below 50 into contraction for the first time since February. This was in line with both the Bloomberg and Reuters forecasts. This reading marks a three-year low for the Chinese manufacturing sector, reinforcing fears about the slowdown in the world’s second largest economy. Later today we will also see the PMI prints for Europe and the US. In the US, the manufacturing sector continues to perform well, and according to the US ISM index, the US manufacturing sector has expanded continuously since December 2012. Expectations are for the August print to come in at 52.5 pts. In the Eurozone, the Markit PMI is also expected to signal expansion, at 52.4 pts.

The People’s Bank of China set the reference rate for the renminbi 0.2% stronger this morning in an effort to undo some of the damage done to the currency on the back of the bad PMI data.

The Asian markets reacted predictably and were all down at the time of writing. The Shanghai Composite was 1.7% down, the Shenzhen Composite was 3.3% down, the Japanese Nikkei was 2.9% down, and the Hong Kong Hang Seng was 0.7% down. S&P futures are already down 1.6% this morning on the back of this news.

Oil continues to bounce back from the recent lows, with Brent crude oil now trading back at $52.50 from a low of $42.25 slightly more than a week ago. Brent has rallied $9 in three sessions. Yesterday’s rally follows the release of the OPEC Bulletin in which comments were made that the cartel remains committed to an equilibrium price for the oil market and is willing to talk to all parties in achieving this price. These comments in the magazine was interpreted by some that OPEC is starting to feel too much pain and may be willing to commit to supply cuts again. However, any higher price of oil is likely to incentivize non-OPEC to increase, or at least maintain production given that non-OPEC members operate under a profit-maximization model. We ascribe to the rally in oil to short-covering rather than a change in the underlying fundamentals of the market.

That said, the rally in the oil price has resulted in a deterioration of South Africa’s commodities terms-of-trade given that South Africa’s major commodity export prices have not risen by nearly the same extent. Although the rand is dominated by global market events at the moment rather than domestic events, the move in oil is on balance rand-negative. Perhaps more concerning is that oil denominated in rand has rallied almost 30% over the past two weeks due to a higher oil price and the slide in the rand and is now at the same level when the MPC meeting was held in June.

In Australia the Central bank kept their target rate unchanged at 2% – the lowest level on record. Like South Africa, the Australian economy is struggling with the decline in commodity prices – in particular iron ore which is Australia’s largest export commodity. Worth noting, like the rand, the Australian dollar has been under pressure against the dollar in recent months – losing 15% of its value against the greenback since January. The rand has also lost 15% against the dollar YTD.

In the bond market, the UST 10-year bond yield remains steady around the 2.18% level. With US non-farm payroll data out on Friday one would expect the bond markets to remain range-bound.

Local developments

SARS released the July trade balance data yesterday. Bloomberg consensus was pencilling in a deficit of -ZAR1.6 billion in July from a surplus of ZAR5.8 billion in June, while the Reuters poll had predicted a surplus of ZAR1.5 billion. In the event, the trade balance swung back into deficit territory, recording a marginal deficit of -ZAR0.4 billion in July, while the June numbers were revised down to ZAR5.5 billion. Our economics team noted that the lower oil price, double-digit increases in the volume of certain commodity exports compared with 2014, as well as a contraction in non-mineral import volumes, have helped to ameliorate the significant declines in commodity prices.

YTD SA’s cumulative the trade balance of ZAR25.2 billion is well below the cumulative balance as at July 2014 of ZAR53.4 billion. Our economics team expects SA’s terms of trade to deteriorate further in H2:15, by about 4.5% versus H1:15. This will start to have a more negative impact on the trade balance as of September, as base effects from last year’s strikes fade.

The Barclays Manufacturing PMI data for August is due for release today at 11h00. Recall: the July numbers overshot Bloomberg consensus expectations, coming in at 51.4 pts in July, the same as in June. The BER noted, however, that only 4 of the 9 sub-components of the Index had improved in July. Notably, business activity, one of the major sub-components of the index, increased in July, to 53.2 pts from 51.7 pts in June. Inventories improved to the highest level since January 2015, to 60.2 pts in July from, 56.8 pts in June. Bloomberg consensus is now pencilling in a slippage in the index to 51.1 pts in August.

Naamsa’s release of the vehicle sales data today is expected to reflect an industry that is struggling to make gains. The Bloomberg consensus polls are indicative of yet another y/y contraction of -4.1% in August, from -6.1% y/y in July. While overall sales are expected to contract on a y/y basis in 2015, the VWSA deal announced last week is likely to benefit the industry in the medium term.

Given the recent decline in the oil price, the Department of Energy has announced a drop in the petrol price (95 and 93) of 69c/l to R12.57/l from R13.26/l. The price of Brent crude dropped to $46.93/bbl during the period under review. Had the rand not been as weak in August, the oil price decline would have been about 20c/l more. The price of diesel (0.05% sulphur) will also fall by 54c/l to R10.40/l from R10.94/l last month. The price declines are effective as of midnight on 2 September.

Markets

The rand strengthened somewhat on Monday, closing at 13.28, compared to Friday’s close of 13.30. The rand’s appreciation against the greenback occurred in line with dollar weakness against some of the major currencies; the dollar posted losses against the yen (-0.4%) and the euro (0.2%), but gained against the pound (-0.3%). The rand strengthened against most of the major crosses; the rand gained ground against the pound (-0.5%) and marginally against the euro, but lost ground against the yen (-0.2%). 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 fourth-worst performance amongst the EM currencies, behind the RUB, HUF and TRY. The rand traded between a low of USDZAR13.2332 and a high of USDZAR13.3656.

Commodity prices were mixed on Monday. Platinum and copper were down on Monday, by 0.8% and 0.1% respectively, while gold was up 0.1% on the day. Brent closed the day 8.2% higher, at $54.15/bbl. Both the developed world MSCI and the MSCI EM were down by 0.8% and 0.2% respectively on Monday. The ALSI was down fractionally on the day. Non-residents were net buyers (ZAR4.153 billion) of equities on the day. The EMBI spread narrowed on Monday, by 8 bps, and SA’s 5yr CDS widened by 1 bp. The CBOE VIX Index, a volatility-based proxy for global risk appetite/aversion, increased by 9.1%.

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SA Macroeconomics: Bracing for China’s hard landing SA’s trade balance records a marginal deficit of R0.4Bn by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (31 August 2015)

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