Standard Bank Research Team
Standard Bank
We finally have Fed lift-off. As expected, the Fed raised interest rates 25bps last night for the first time since the financial crisis. They adjusted their growth forecast for 2016 up from 2.3% to 2.4%.
The Fed rates hike appears to have been largely priced in to the market already, as we have seen little movement in currencies or bonds since the announcement last night. The US 10-year bond yield has moved little and is still trading around the 2.25% level, while EM currencies are also steady.
With the Fed hike out of the way, into year-end we would not be surprised to see the rand move below 15.00 and perhaps closer to the 14.60 level. However, we would expect this level, which was where the rand traded a week ago, to provide resistance. Any strength in the rand may be short lived.
Moody’s ratings agency downgraded SA’s sovereign credit rating outlook to negative from stable early yesterday, but maintained its credit grade at Baa2. The move, however, still keeps SA’s rating status one notch above that of S&P, who also recently downwardly revised SA’s outlook to negative, and Fitch.
Stats SA releases the PPI data print for November today at 11:30. Expectations are for PPI to have increased to 4.5% y/y in November from 4.2% y/y in October. On a m/m basis, PPI growth is expected to have moderated to 0.4% in November from 0.9% in October.
International developments
We finally have Fed lift-off. As expected, the Fed raised interest rates by 25bps last night for the first time since the financial crisis. They adjusted their growth forecast for 2016 up from 2.3% to 2.4%, and their median unemployment rate forecast down from 4.8% to 4.7%.
The Fed rate hike appears to have been largely priced in to the market already, as we have seen little movement in currencies or bonds since the announcement last night. The US 10-year bond yield has moved little and is still trading around the 2.25% level, while EM currencies are also steady. After a brief rally towards 14.80, the rand is now at 15.00 – a similar level than before the Fed hike. There was also a fear that Asian markets would take a hit after lift-off, but those markets are all trading in the green this morning. This move has been long anticipated and the Fed has done a good job of signalling the policy shift.
More importantly, the Fed has stressed that any further policy moves will be gradual. According to the Fed’s own forecast, there will still be 4 hikes in 2016 (of 25bps each), but beyond that their expectations of rate hikes have declined marginally and FOMC members now expect the Fed funds rate to be at 2.375% at the end of 2017, from 2.625% at the September meeting.
With the Fed hike out of the way, into year-end we would not be surprised to see the rand move below 15.00 and perhaps closer to the 14.60 level. However, we would expect this level, which was where the rand traded a week ago, to provide resistance. Any strength in the rand may be short-lived. As noted in our report “Reading the Ratings”, where we simulate a sudden-stop scenario uniformly across 10 EM countries, South Africa appears the most vulnerable. We believe the past week has given us some taste of how the currency may react. Temporary rand strength may aid SAGBs but, as with the rand, we expect the rally to stall.
Asian markets took the US rate hike well and are having a good morning of trade following a positive lead from Wall Street. The S&P closed 1.5% up yesterday, while the Dow Jones made gains of 1.3%. At the time of writing the Shanghai Composite was 1.5% up, the Shenzhen Composite was 2% up, the Japanese Nikkei was 1.8% up, and the Hong Kong Hang Seng was 1% up.
The RMB is still struggling as the PBoC set the reference rate lower for the ninth day in a row this morning at its weakest fix since mid-2011.
Japanese trade data was released this morning. The trade balance for November is now in a deficit after recording a surplus in October, and although this was expected, the deficit came in narrower than expected at –JPY379.7bn above expectations of –JPY446.2bn. Exports fell 3.3% y/y and imports fell 10.2% y/y.
The US will release its current account data for Q3:15 today, which is expected to come in at –USD118bn down from –USD109.7bn in Q2:15.
Local developments
Moody’s ratings agency downgraded SA’s sovereign credit rating outlook to negative from stable early yesterday, but maintained its credit grade at Baa2. The move, however, still keeps SA’s rating status one notch above that of S&P, who also recently downwardly revised SA’s outlook to negative, and Fitch. Moody’s noted that weak economic growth is likely to persist while the “risk of fiscal slippages in the face of both slower growth and increasing political pressures” is on the rise. The agency also voiced its concern around the dismissal of former Finance Minister, Nhlanhla Nene, which exacerbates credit worthiness concerns. We believe, however, that the reappointment of Pravin Gordhan as Finance Minister will go a long way in repairing some of these concerns.
Stats SA releases the PPI data print for November today at 11:30. Expectations are for PPI to have increased to 4.5% y/y in November from 4.2% y/y in October. On a m/m basis, PPI growth is expected to have moderated to 0.4% in November from 0.9% in October. The ascent of PPI was driven by coal and petroleum products, which moderated to -2.3% y/y in October from -5.1% y/y in September. Within this category, both petrol and diesel slowed, contributing a combined 0.5 ppts to the headline PPI print in October. Food PPI rose only slightly to 6.0% y/y from 5.8% y/y. Our economics team notes that this should moderate expectations for food CPI.
Markets
The rand weakened on Wednesday, closing at 14.94, compared to Tuesday’s close of 14.92. The rand’s depreciation against the greenback occurred in line with dollar strength against all of the major currencies; the dollar posted gains against the yen (0.4%), the pound (-0.2%) and the euro (-0.2%). The rand’s performance was stronger against some of the major crosses; the rand gained ground against the yen (0.3%), the pound (-0.1%) and the euro (-0.1%). The rand put in the best performance amongst the commodity currencies we monitor for purposes of this report, and put in the second-best performance amongst the EM currencies, only behind the MXN. The rand traded between a low of USDZAR14.8084 and a high of USDZAR15.0998.
Metal prices were up on Wednesday. Platinum and gold were up on Wednesday, by 2.2% and 1.1%, respectively, while copper was up by 1.0% on the day. Brent closed 3.3% lower, at $37.19/bbl. Both the developed world MSCI and the MSCI EM were up on Wednesday, by 1.3% and 1.4%, respectively. The ALSI was up 0.7% on the day. The EMBI spread widened by 3 bps on the day and SA’s 5yr CDS widened by 5 bps. The CBOE VIX Index, a volatility-based proxy for global risk appetite/aversion, decreased by 14.75%.
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
AUD/USD tumbles toward 0.6350 as Middle East war fears mount
AUD/USD has come under intense selling pressure and slides toward 0.6350, as risk-aversion intensifies following the news that Israel retaliated with missile strikes on a site in Iran. Fears of the Israel-Iran strife translating into a wider regional conflict are weighing on the higher-yielding Aussie Dollar.
USD/JPY breaches 154.00 as sell-off intensifies on Israel-Iran escalation
USD/JPY is trading below 154.00 after falling hard on confirmation of reports of an Israeli missile strike on Iran, implying that an open conflict is underway and could only spread into a wider Middle East war. Safe-haven Japanese Yen jumped, helped by BoJ Governor Ueda's comments.
Gold price jumps above $2,400 as MidEast escalation sparks flight to safety
Gold price has caught a fresh bid wave, jumping beyond $2,400 after Israel's retaliatory strikes on Iran sparked a global flight to safety mode and rushed flows into the ultimate safe-haven Gold. Risk assets are taking a big hit, as risk-aversion creeps into Asian trading on Friday.
WTI surges to $85.00 amid Israel-Iran tensions
Western Texas Intermediate, the US crude oil benchmark, is trading around $85.00 on Friday. The black gold gains traction on the day amid the escalating tension between Israel and Iran after a US official confirmed that Israeli missiles had hit a site in Iran.
Dogwifhat price pumps 5% ahead of possible Coinbase effect
Dogwifhat price recorded an uptick on Thursday, going as far as to outperform its peers in the meme coins space. Second only to Bonk Inu, WIF token’s show of strength was not just influenced by Bitcoin price reclaiming above $63,000.