ZAR touches 14.00 on risk aversion

• The rand pushed through the 13.00 level this morning, briefly touching 14.00 against the dollar. It is currently just above 13.30; the market will be looking at 13.50 for support. 

• Markets have gone into risk-aversion mode, with global equities and commodities under pressure. Risk aversion is clear from the VIX Index which jumped from 20% to 28% on Friday – a level last seen in October 2014. We expect further volatility as concerns over EM markets grow. 

• Asian equity markets have had a bad start to the week. At time of writing, the Shanghai Composite was down 8.45%, effectively giving up all its gains for the year. This index was up more than 63% for the year just three months ago.
  

•  Risk aversion will likely spill over into US trading later today, with the US equity futures also taking a hit this morning. The S&P and Dow Jones futures contract for September are both down 3%. 

• It’s a busy week on the domestic front. The SARB’s leading indicator for June is scheduled for release tomorrow at 09h00. Mining production data for June, due out on Tuesday, is expected to have increased to 3.1% y/y from 2.7% y/y in May. 

• Stats SA’s release of GDP data for Q2:15 is scheduled for Tuesday at 11h30. GDP growth is expected to have slipped to 2.0% y/y, from 2.1% y/y in Q1:15. Standard Bank expects growth of 2.9% y/y for Q2:15.

International developments

This morning, the rand pushed through the 13.00 level, touching 14.00 against the dollar. The currency is currently trading just above 13.30, and the market will be looking at the 13.50 level for support. A close above this number could set up the rand for further weakness.

Markets have gone into risk-aversion mode, with global equities and commodities under pressure. Risk aversion is clear from the VIX index which jumped from 20% to 28% on Friday – a level last seen in October 2014. Overall we would expect volatility to remain in place as concerns over EM markets grow. While EM currencies are taking a blow, we would expect local SA yields also to remain on the back foot today despite USTs finding good support. The UST 10y yield has strengthened to 2% after trading at 2.5% less than three months ago.

Asian equity markets have had a bad start to the week. At time of writing, the Shanghai Composite was down 8.45%, effectively giving up all its gains for the year. This comes after the Shanghai Composite Index was up more than 63% for the year just over three months ago. Also this morning, the Shenzhen Composite was down 7.6%, the Japanese Nikkei was down 4.6%, and the Hong Kong Hang Seng was down 4.6%. All eyes will be on the People’s Bank of China to see what steps they might take to stem the rout and whether there may be further renminbi devaluation. As mentioned last week, we are left with little doubt that further devaluation of the RMB would be rand-negative (see our report When China devalues dated 17 Aug’15). Although these moves in the rand would be consistent with the trend in our FX forecasts, today’s substantial weakness is unexpected. We expected the rand to weaken towards 13.50 only towards the middle of next year (for more detail on our FX forecasts see our report FX Weekly: Rand weaker as cyclical drivers and EM support wane dated 12 Aug’15).

It seems that risk aversion will spill over into US trading later today, with the US equity futures also taking a hit this morning. The S&P and Dow Jones futures contract for September are both down 3%.

Although markets will be on edge, data-wise it is set to be a quiet day on the international front, with no major data releases due in the US, EU or China.

Local developments

It’s a busy week on the domestic front. The SARB’s leading indicator for June is scheduled for release tomorrow at 09h00. A further slippage in the index is anticipated from 93.4 pts in May. Stats SA also releases the mining production data for June tomorrow at 11h00. Bloomberg consensus pencils in an increase in mining output to 3.1% y/y from 2.7% y/y in May. The range is quite wide, with a low of -2.5% y/y, and a high of 7.4% y/y expected. Our SBGS economists expect mining output to have increased by 3.0% y/y. June is a seasonally stronger month; they therefore think that mining is likely to continue benefiting from positive base effects on the back of the strikes in PGM sector which spanned January to June 2014. Furthermore, favourable base effects are likely to continue into the beginning of Q4:15 as mining companies would have taken around three to four months to begin producing at full capacity again.

On a m/m basis, mining production is expected to have remained in negative territory, albeit improving from May’s massive decline of 4.7%. A decline of 0.7% is expected for June.

Stats SA’s release of the GDP data for Q2:15 is also scheduled for Tuesday at 11h30. GDP growth is expected to have slipped in Q2:15 to 2.0% y/y from 2.1% y/y in Q1:15. Standard Bank expects growth of 2.9% y/y for Q2:15. On an annualised q/q basis, GDP growth is expected to have fallen further to 0.7% from 1.3% in Q1:15.

Lastly, Stats SA releases the July PPI print on Thursday at 11:30. Bloomberg consensus is pencilling in an increase to 3.8% y/y in July from 3.7% y/y in June.

Markets

The rand weakened on Friday, edging closer to 13.00, then closing at 12.97, compared to Thursday’s close of 12.94. The rand’s depreciation against the greenback occurred despite dollar weakness against all of the major currencies; the dollar posted losses against the euro (1.3%), the yen (-1.1%) and marginally against the pound. The rand weakened against all of the major crosses; the rand lost ground against the euro (1.6%), the yen (-1.4%) and the pound (0.3%). The rand put in the second-worst performance amongst the commodity currencies we monitor for purposes of this report, only ahead of the CAD and put in the third-best performance amongst the EM currencies, behind the HUF and TRY. The rand traded between a low of USDZAR12.8879 and a high of USDZAR12.9859.

Commodity prices were mixed on Friday. Gold was up on Friday, by 0.8%, while copper and platinum were down by 1.3% and 1.2% respectively. Brent closed the day 2.5% lower, at $45.46/bbl. Both the developed world MSCI and MSCI EM were down on Friday, by 2.7% and 2.2% respectively. The ALSI was down by 1.5% on the day. Non-residents were net sellers (ZAR482 billion) of equities. The EMBI spread widened on Friday, by 8 bps, and SA’s 5yr CDS widened by 10 bps. The CBOE VIX Index, a volatility-based proxy for global risk appetite/aversion, increased by 45.5%.

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