Markets mixed after Black Monday

• Markets are mixed after the extreme volatility yesterday. The rand has stabilised between 13.10 and 13.20. Should the extreme risk aversion subside somewhat, the rand may trade closer to 13.00 today.

• While the rand took a beating, it was certainly not alone. Many other currencies saw similar extreme moves during the early hours of yesterday morning. The New Zealand Dollar was down more than 6% against the dollar. 

• From early morning trade, it does appear as if some markets have decoupled from the Chinese equity markets. Whereas yesterday’s 8% slide in the Shanghai equity market pushed equity indices across the globe deeply into negative territory, this does not seem to be the case today. 

• The extent of the market panic yesterday was clear in the VIX index which spiked to 40% — its highest level since October 2011. Risk aversion has supported UST, with the 10-year UST yield dropping to just above 2% yesterday.

• Local data may overshadow international data releases today. 

• The SARB’s leading indicator for June is scheduled for release at 09h00. A further slippage in the index is anticipated from 93.4 pts in May. Stats SA will release mining production data for June at 11h00. Bloomberg consensus pencils in an increase in mining output 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 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 forecasts 2.9% y/y.

International developments

Markets are mixed after the extreme volatility yesterday. The rand has stabilised between 13.10 and 13.20. Should the extreme risk aversion subside somewhat, the rand may trade closer to 13.00 today. However, commodity markets are likely to remain on the back foot and we would not expect any substantial support for the currency just yet. Whereas 13.00 proved resistance for the USDZAR last week, this level should now provide support.

While the rand took a beating, it was certainly not alone. Many other currencies saw similar extreme moves during the early hours of yesterday morning. The New Zealand Dollar was down more than 6% against the dollar yesterday morning. Other EM currencies such as the Turkish lira and the Chilean peso were also on the back foot, although not to the same extent.

From early morning trade it does appear as if some markets have decoupled from the Chinese equity markets. Whereas yesterday’s 8% slide in the Shanghai equity market pushed equity indices across the globe deeply into negative territory, this does not seem to be the case today. This morning, the Shanghai Composite is down more than 4%. But the rest of the equity world is mixed. The ASX200 in Australia is up almost 2% so far this morning; in Indonesia, Malaysia, Taiwan and Thailand shares are also higher, and the US S&P futures too are in the green.

The People’s Bank of China set the reference rate for the renminbi at 0.2% weaker than yesterday, making it the biggest devaluation since they began their new method of valuing the currency since August 13th. Emerging markets were in turmoil after the shock sell-off yesterday, and the ZAR lost 2% of its value against the USD. We expect substantial devaluation of the renminbi to be rand-negative (see our report When China devalues dated 17 Aug’15).

The extent of the market panic yesterday was clear in the VIX index which spiked to 40% yesterday — its highest level since October 2011. Risk aversion has supported UST, with the 10-year UST yield dropping to just above 2% yesterday. However, South African yields were dominated by the rand sell-off and global risk aversion. The R186 pushed above 8.50% for the first time since early 2014.

There is a barrage of data out of the US today, with US house prices, consumer confidence data and new home sales data on the radar. However, local data in South Africa — especially mining production and Q2:15 GDP data — may dominate international data releases today.

Local developments

The SARB’s leading indicator for June is scheduled for release at 09h00 today. A further slippage in the index is anticipated from 93.4 pts in May. Stats SA will also release mining production data for June at 11h00 today. 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 forecast for June.

Stats SA’s release of GDP data for Q2:15 is also scheduled for 11h30 today. 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. On an annualised q/q basis, GDP growth is expected to have fallen further to 0.7% in Q2:15 from 1.3% in Q1:15.

Markets

The rand weakened on Monday, closing at 13.23, compared to Friday’s close of 12.97. The rand’s depreciation against the greenback occurred despite dollar weakness against all of the major currencies; the dollar posted losses against the yen (-3.0%), the euro (2.0%) and the pound (0.5%). The rand weakened against all of the major crosses; the rand lost ground against the yen (-4.9%), the euro (4.1%) and the pound (2.5%). The rand put in the second-worst performance amongst the commodity currencies we monitor for purposes of this report, ahead of only the CAD, and put in the second-best performance amongst the EM currencies, behind only the HUF. The rand traded between a low of USDZAR12.9553 and a high of USDZAR14.0682.

Commodity prices were down on Monday. Platinum and copper were down on Monday, by 2.8% and 2.1% respectively, while gold was down 0.5%. Brent closed the day 6.1% lower, at $42.69/bbl. Both the developed world MSCI and MSCI EM were down on Monday — by 3.7% and 5.0% respectively. The ALSI was down 2.8%. The EMBI spread widened on Monday, by 18 bps, and SA’s 5yr CDS widened by 11 bps. The CBOE VIX Index, a volatility-based proxy for global risk appetite/aversion, increased by 45.3%.

Latest SA publications

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)

SA Macroeconomics: We revise our commodity price and currency outlook: Risks to commodity prices lie to the downside & we adjust our ZAR forecast weaker by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (13 August 2015)

SA FX Weekly: Rand weaker as cyclical drivers and EM support wane by Walter de Wet, Shireen Darmalingam and Penny Driver (12 August 2015)

SA Macroeconomics: June manufacturing -0.4% y/y: Q2 contracts -4.9% q/q saar, sending the sector into recession by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (11 August 2015)