Will the ECB offer more clarity on ABS purchases?

FX

The ECB is expected to leave policy unchanged today. However, Steve Barrow (our G10 FIC Strategist) thinks that Draghi does have some holes to fill with respect to the ABS purchase plan that the Bank has already flagged. This is one part of a two-pronged attack to lift bank lending, the other being the targeted long-term repos (TLTRO). The main issue with respect to the ABS plan is the quality of the assets the Bank will consider buying. In the past, it has suggested that it wants to buy “transparent” ABS securities, but this is not very specific. Draghi should make things clearer today. Reports this week suggested that the Bank would take the credit definition low enough to be open to all Eurozone countries. But that presumably won’t please some of the hard-line Eurozone members, such as Weidmann from the Bundesbank. This being said, stories suggest that Weidmann has refused to support the ABS plan and hence, even if Draghi and others were using much tougher criteria for ABS purchases, Weidmann would probably still object. Draghi might also give some idea of how many ABS and covered bonds the Bank thinks it can buy. So far Draghi has seemed to suggest that the Bank would like to increase its assets by up to EUR1.0 trillion and, with the TLTRO plan set at a maximum of EUR400 billion or so for this year (with more to follow), it looks as if the ABS/covered bond program might have to deliver up to a half of this EUR1.0 trillion. But Steve notes that, whatever Draghi might specify as a target, these TLTRO and ABS/covered purchase schemes are crucially dependent on banks wanting to borrow cash and sell the ECB securities. As we already saw in the first TLTRO last week, banks demand might fall well short. For this reason, it’s hard to see why the market should be particularly excited if the ECB sets high targets for the ABS/covered bond programs.

While higher bank lending may help to lift Eurozone inflation, Steve’s view is that the most important part of any inflation-boosting strategy is currency weakness. Draghi has to be careful about going too hard on the euro. Eurozone policy on the common currency is not dictated by the ECB alone, but in conjunction with the Eurogroup of finance ministers. On top of this, G20 communiques pledge to let markets decide currency values and, even if Draghi can avoid any charge of spoiling this agreement, there will be plenty bemoaning a new entrant to the ‘currency war’ should Draghi become too explicit about the desirability of a lower euro. But, in spite of these constraints, Steve believes that the ECB is rightly – and somewhat surreptitiously – trying to weaken the currency, and that ECB members – including Draghi – will highlight the role of the euro in the transmission mechanism. So, while there might possibly be a rise in the euro if the ECB leaves policy unchanged and appears a bit stingy with its ABS plan, Steve does not see the meeting as any impediment to a lower euro over time. What’s more, with the payroll data from the US tomorrow, the extent of any market reaction today might be limited as traders and investors await US jobs numbers.

Local manufacturing PMI data for September was released yesterday. The outcome, at 50.7, was slightly better than the market had anticipated (Bloomberg consensus: 50.1) and – more crucially – pushed above the key expansion/contraction threshold of 50 for the first time since March of this year. The release attributed the uptick to improving output. The business activity index rose by a meaningful 5.6 points to 53.0 in September. This is understandable given the unwind of strike impacts, including not only July’s NUMSA strikes, but also spillover effects into manufacturing activity of PGM industry work stoppages running till June. However, the release noted the absence of an improvement in demand, with the new sales orders index remaining below 50.0 and moving slightly lower to 49.6 from 49.8. Domestic demand was described as “recovering” as strike impacts faded, but global demand remained “subdued”. The PMI leading indicator deteriorated modestly, signifying weak new sales orders in relation to inventory levels. This has been a feature of the survey results since the start of the year. Yesterday’s release is more reflective of weak demand than unusually high levels of inventory.

After eight consecutive months of y/y declines, yesterday’s release of vehicle sales data surprised to the upside, with NAAMSA reporting a 11.5% y/y increase in September. Analysts had anticipated an easing in the y/y rate of contraction to -0.5% from -1.4% in August. SBGS equity analyst Eckhard Goedecke points out that temporary factors, such as new launches and model face-lifts, contributed to the increase, and he remains cautious on the outlook for new car sales. Slowing growth of consumer demand, rising vehicle prices and interest rate hikes will continue to weigh on performance in the sector.

The BER’s local Consumer Confidence Index will be published today. It bounced to 4.0 in Q2:14 following consistently negative scores over the prior three quarters. This was somewhat surprising, given the continued deceleration in consumer spending, weakness in employment trends, slowing growth of household disposable incomes and elevated domestic inflation. We would not be surprised to see this buoyancy reverse in the Q3:14 result, given in particular a 25 bps interest rate hike from the SARB in July. Also out today are local electricity production and consumption (y/y%) figures, both for the month of August. There are no consensus forecasts for these figures. The y/y contraction in electricity production, at -3.1% y/y in July, was unchanged versus June’s result. The y/y contraction in electricity consumption meanwhile deepened in July to -3.2% from -2.7% in June.

The rand appreciated against the US dollar yesterday after four consecutive trading days of weakness, closing at USDZAR11.27, compared with Tuesday’s close of USDZAR11.29. The rand’s appreciation against the greenback occurred into a mixed performance from the dollar against the major crosses and into a mixed performance from EM currencies. The dollar strengthened against the pound and the euro, while weakening against the yen. The rand appreciated against the dollar, the euro and the pound, while weakening against the yen. Three of the five commodity currencies we monitor for the purposes of this report – namely, the AUD, the NZD and the NOK – depreciated on the day; the remaining two currencies - namely, the ZAR and the CAD - appreciated. Five of the nine EM currencies we monitor – namely the IDR, HUF, INR, ZAR and THB – appreciated on the day; the remaining four currencies – the MXN, TRY, RUB and BRL – depreciated. The rand was the second-best-performing commodity currency (beaten only by the CAD) and was the fourth-best-performing EM currency (beaten only by the INR, the HUF and the IDR) on the day. The rand traded between a low of USDZAR11.2360 and a high of USDZAR11.3547 on the day. Support from where the rand opened this morning 11.2200, 11.1800, 11.0800 and 10.9600. Resistance levels sit at 11.3550, 11.4000, 11.5000 and 11.8800.

With regard to commodity prices, gold and copper rose by 0.5% and 0.2% respectively. Platinum and Brent meanwhile fell by 1.3% and 0.5% respectively. The ALSI fell by 1.0% and the EM MSCI fell by 0.8%. The EMBI spread widened by 6 bps, while SA’s 5yr CDS spread compressed by 2 bps. The CBOE VIX index, a volatility proxy for global risk appetite/aversion, rose by 2.5%.

Non-residents were meaningful net buyers of local equities (ZAR1 305 million) but were aggressive net sellers of local bonds (-ZAR2 929 million). Selling of bonds was seen across the 3-7 (-ZAR1 283 million), 12+ (-ZAR1 154 million), 7-12 (-ZAR408 million) and 1-3 (-ZAR85 million) year buckets. The curve flattened on the day, mainly owing to a kick up in yields in the short and short to medium dated portion of the curve. The R203 and R208 yields rose by 4 bps and 2 bps, respectively; while the R214 and R186 yields fell by 2 bps and 1 bp, respectively. The 3-month Jibar fell by 1 bp from 6.133% to 6.125%. The 3x6 FRA fell by 2 bps, and the 6x9 and 12x15 FRAs both fell by 3 bps.

FI

We have seen a 15c strengthening in USDZAR from yesterday’s weakest level of 11.35 to this morning’s opening level. Overnight, there was a massive move in US Treasuries, with 10yr USTs moving 10 bps stronger to trade at 2.40%. This should provide some strength to bonds on the open. Auction bonds are currently slightly out the money for non-comp takeup. All three bonds are only eligible for 50% take-up, after the R2044 passed the ZAR10bn outstanding level and became PD market-making stock.

Decent turnover of ZAR24.6bn yesterday, with the R186 accounting for 29% of turnover and a further 31% from the R208 and R2023. Offshore investors sold the front half of the curve up till the R213 and bought the back of the curve from the R2032 and onwards. The offshore trading saw front end rates sell off and back-end bonds rally. The R203 and R204 led the weakness with moves of +4 bps, while the R186 moved 1.5 bps stronger. FRAs followed the stronger currency, shifting a couple of bps lower.

Non-residents were significant net sellers of nominal SAGBs yesterday for a total of -ZAR2.93bn. All four maturity categories recorded net selling on the day. The 3-7 year segment recorded foreign selling of -ZAR1.28bn due to large outflows in all three of the bonds comprising the category; -ZAR683m was sold in the R204; -ZAR472m was sold in the R207; and -ZAR127m was sold in the R208. Foreigners sold -ZAR1.15bn in the 12+ year segment, with notable net selling recorded in the R186 (-ZAR1.12bn), R213 (-ZAR464m) and R2030 (-ZAR420m); this was partially offset by net inflows into the R2032 (+ZAR402m) and the R209 (+ZAR305m). The R2023 in the 7-12 year segment recorded net foreign selling of -ZAR408m on the day.

The US Treasury curve bull flattened yesterday, as yields fell by large increments. The yield on the 2yr UST fell by 5.12 bps to a yield of 0.52%, while the yield on the 5yr UST closed at 1.67%, 8.68 bps lower. At the longer-end, the 10yr note fell by 10.32 bps to 2.39%, while the 30yr note fell by a similar 10.48 bps to 3.09%.

EM FI and currency movements strengthened overall yesterday as most of the EMs we monitor for the purposes of our reports recorded stronger moves. In the FI space, 5yr local currency sovereign yields fell by 3.36 bps on average, and at the long-end, 10yr yields fell by 2.22 bps on average. SA recorded a weak performance against its EM peers, with the 5yr yield rising by 3.80 bps, recording the worst performance in this space. In the 10yr space, SA’s yield rose by 0.10 of a bp, with larger moves weaker recorded in Brazil (+19.40 bps) and Hungary (+2.00 bps). In the 5yr space, Turkey (-9.00 bps), Mexico (-8.70 bps) and Poland (-7.00 bps) recorded the three best movements respectively, and in the 10yr space, Turkey (-16.00 bps), Poland (-6.10 bps) and Indonesia (-5.60 bps) recorded the strongest moves.

EM currency markets appreciated on average yesterday. The exceptions were the Brazilian real, which depreciated by a significant 1.40%, ahead of marginal moves weaker in the Russian ruble (0.23%), Turkish lira (0.22%) and Mexican peso (0.20%). The Indonesian rupiah appreciated by 0.43%, followed by the Hungarian forint (0.30%), Indian rupee (0.24%) and SA rand (0.17%). The Polish zloty (0.09%) and the Thai baht (0.03%) also appreciated marginally on the day.

Latest SA publications

Credit & Securitisation Flash Note: Capitec Bank Ltd by Robyn MacLennan (1 October 2014)

Fixed Income Weekly: Analysing 2014/15 SAGB auctions by Asher Lipson and Kuvasha Naidoo (26 September 2014)

Credit & Securitisation Weekly: NCR releases Q2 credit market data by Robyn MacLennan and Steffen Kriel (26 September 2014)

Fixed Income Weekly: Dovish SARB forecasts are bond positive by Asher Lipson and Kuvasha Naidoo (19 September 2014)

Credit & Securitisation Weekly: Eskom support package announced by Robyn MacLennan and Steffen Kriel (19 September 2014)

South Africa FIC: MPC meeting: less hawkish by Bruce Donald and Marc Ground (19 September 2014)

SA Fixed Income ALBI note: October ALBI reweighting by Asher Lipson and Kuvasha Naidoo (16 September 2014)

South Africa FIC: MPC meeting: back in a corner by Bruce Donald (15 September 2014)

TX Thematic: The Fed, the SARB & the rand: life after “lift-off” by Bruce Donald (15 September 2014)

FX Weekly: FOMC & MPC: you go first by Bruce Donald, Marc Ground and Varushka Singh (15 September 2014)

Credit & Securitisation Weekly: S&P comments on local banks by Robyn MacLennan and Steffen Kriel (12 September 2014)

Fixed Income Weekly: Jibar, the repo rate and FRAs by Asher Lipson and Kuvasha Naidoo (11 September 2014)