ZAR under pressure

• The rand remains under pressure as the global stock rout continues. Although it traded briefly above 14.00 against the dollar last week, the rand saw its weakest close against the dollar yesterday, at 13.45.

• Risk aversion remains elevated, as is clear from the VIX index which is at 31.40 although still below the levels seen last week when it hit 53. The market clearly remains concerned over EM economies, as is evident in the blow-out of the EMBI spread as well as individual country CDS. South Africa’s 5y USD CDS has moved back up to 267 bps — close to levels seen last week Monday.

• Oil has erased much of its Monday and Tuesday gains as the crude market continues to be whipsawed by volatility. Brent crude is back below $50/bbl.

• Australian GDP numbers disappointed this morning, with y/y coming in at 2.0%, the slowest growth since 2013, and below expectations of 2.2%.

• The Barclays Manufacturing PMI data for August was released yesterday. The PMI is back in contractionary territory, at 48.9 pts in August, after three consecutive months of expansion.

• Naamsa’s release of vehicle sales data yesterday reflects an industry struggling to make gains. Vehicle sales contracted by -8.1% y/y, with 51,055 vehicles sold in August (compared to 54,083 in July). All categories of vehicle sales fell in August, with the biggest y/y declines noted in the sales of heavy commercial vehicles and extra heavy commercial vehicles.

International developments

The rand remained under pressure as the global stock rout continues. Although the rand traded briefly above 14.00 against the dollar last week, the rand saw its weakest close against the dollar yesterday, closing at the 13.45 level. The 13.50 level is likely to be a key physiological level for the currency. The rand’s slide, which was broadly in line with other EM and commodity currencies such as the TRY, BRL, RUB and AUD, came on the back of all major equity indices in Asia, Europe and the US closing lower yet again yesterday.

Risk aversion remains elevated, as is clear from the VIX index which remains elevated at 31.40 although still below levels seen last week when it hit 53. We note that the market clearly remains concerned over EM economies, as is evident in the blow-out of the EMBI spread as well as individual country CDS. South Africa’s 5y USD CDS has moved back up to 267 bps — close to levels seen last week Monday.

Oil has erased much of the gains seen on Monday and Tuesday as the crude market continues to be whipsawed by market volatility. Brent crude is back below $50/bbl. As mentioned yesterday, we ascribe to the rally in oil to short-covering rather than a change in the underlying fundamentals of the market.

Although the Asian markets had a bad morning, they appear to have rebounded in the afternoon trading session. At the time of writing, the Shanghai Composite was up 0.3%, the Shenzhen Composite was up 0.7%, the Japanese Nikkei was up 0.6%, and the Hong Kong Hang Seng was up 0.03%. The US equity futures are also in positive territory this morning.

Australian GDP numbers were disappointing this morning, with y/y coming in at 2.0%, the slowest growth seen in the country since 2013, and below the expectations of 2.2%. Yesterday the Reserve Bank of Australia kept the target rate unchanged, and the GDP data supports the view that their growth has been sluggish.

A key focus on the international front will be the US ADP employment data for August which is to some degree a precursor to Friday’s official US non-farm payroll data. Expectations are for a print of 200K, up from 185K in July.

Local developments

The Barclays Manufacturing PMI data for August was released yesterday. The August numbers overshot Bloomberg consensus expectations on the downside, coming in at 48.9 pts (expected 51.1 pts) from 51.4 pts in July. The PMI is back in contractionary territory after three consecutive months of expansion. PMI tends to lead manufacturing by around one quarter; however, despite the three consecutive months of prints above 50 pts (May – July), manufacturing growth (%y/y) has remained in contraction since April.

The decline in the PMI was driven primarily by a sharp fall in business activity (output) to 48.6 pts, which subtracted 1.2 pts from August’s print versus July. Business activity improved substantially in July, to 53.2 pts from June’s 51.7 pts, and the retraction in August is concerning. However, rising new sales orders provides some indication of demand in the short term. Employment recorded a faster rate of contraction in August, declining to 45.2 pts from 46.9 pts in July and subtracted 0.3 pts from PMI. Our economics team notes that a sustained increase in business activity has to be achieved before any meaningful increase in employment can occur.

Naamsa’s release of the vehicle sales data yesterday reflects an industry struggling to make gains. The Bloomberg consensus polls were indicative of yet another y/y contraction of -4.1% in August, from -6.1% y/y in July. Vehicle sales contracted by -8.1% y/y, with 51,055 vehicles sold in August (compared to 54,083 in July). All categories of vehicle sales fell in August, with the biggest y/y declines noted in the sales of heavy commercial vehicles and extra heavy commercial vehicles. Growth in new passenger car sales contracted by 7.8% y/y in August. Encouragingly, however, growth in vehicle exports increased by 12.3% y/y in August, with 28,069 vehicles exported to our main trading partners (compared to 28,350 vehicles exported in July). While overall sales are expected to contract on a y/y basis in 2015 (YTD sales are down 3.3% compared to the same period in 2014), the VWSA deal announced last week is likely to benefit the industry in the medium term.

Markets

The rand weakened on Tuesday, closing at 13.45, compared to Monday’s close of 13.28. The rand’s depreciation against the greenback occurred despite dollar weakness against some of the major currencies; the dollar posted losses against the yen (-1.5%) and the euro (0.9%), but gained ground against the pound (-0.3%). The rand weakened against all of the major crosses; the rand lost ground against the yen (-2.8%), the euro (2.2%) and the pound (1.0%). The rand put in the second-worst performance amongst the commodity currencies we monitor for purposes of this report, only ahead of the AUD, and put in the fourth-worst performance amongst the EM currencies, ahead of the MXN, BRL and RUB. The rand traded between a low of USDZAR13.2394 and a high of USDZAR13.4604.

Commodity prices were mixed on Tuesday. Copper and platinum were down on Tuesday, by 1.3% and 0.7% respectively, while gold was up 0.5% on the day. Brent closed the day 8.5% lower, at $49.56/bbl. Both the developed world MSCI and the MSCI EM were down by 2.7% and 2.2% respectively on Tuesday. The ALSI was down by 3.0% on the day. Non-residents were net buyers (ZAR489 million) of equities on the day. The EMBI spread widened on Tuesday, by 12 bps, and SA’s 5yr CDS widened by 18 bps. The CBOE VIX Index, a volatility-based proxy for global risk appetite/aversion, increased by 10.5%.

Latest SA publications

SA Macroeconomics: August PMI retreats to 48.9: China's growth slowdown dampens manufacturing confidence by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (1 September 2015)

SA Macroeconomics: Jul records R0.4Bn trade deficit, YTD deficit shrinks to R25Bn: Base metal exports outperform, non-mineral import volumes contract by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (1 September 2015)

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)

SA FIC Weekly: Stagflation squeeze to tighten by Walter de Wet, Shireen Darmalingam and Penny Driver (31 August 2015)

SA Credit & Securitisation Weekly: Eskom’s coal contract in dispute by Steffen Kriel (28 August 2015)

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)