Banking sector under stress on jump in bond yields

Cape Town – The JSE continued its losing streak following the late-night announcement that President Jacob Zuma’s cabinet reshuffle had taken multiple casualties.

While the market anticipated the move, the timing and magnitude of the reshuffle resulted in an overnight weakening of 3.9% in the rand against the greenback. On Friday, the rand reached an intraday low of R13.61/USD but managed to firm and traded at R13.26 by the close of the JSE.

READ: Gordhan axing: Why the rand is remarkably calm

In terms of the market technical for the day; the blue chip JSE Top 40 lost -0.12%, while the broader All Share Index dropped -0.39%. At the close of the JSE, the Resources Index was up 1.68%, the Industrial Index was 0.06% up.  Although the large rand hedges advanced on the day the index remained under pressure as financial shares faced tragic weakness due to the collapse of the rand with the Financial Index bombing -3.04% lower.

The risk of deteriorated fiscal consolidation, due to the exit of  Pravin Gordhan as an emblem of stability, has deeply affected the yield on long dated government bonds. The yield on the R186 has recently seen a blowout from 8.3% to 8.9% - significantly affecting the price of debt. 

The great negative is that bond yields had eased of late with a degree of confidence returning, as the outgoing finance minister extended the fiscal consolidation of the balance sheet. The ZAR has weakened over 7.8% since Monday, this is less aggressive in comparison to 9 December 2015 when the rand dropped by over 8.9% in two days.  The reduced movement is due to several factors including the more subdued increase in bond yields. In 2015, the 2026 R186 spiked by over 220 basis points on 10 and 11 December 2015 compared with the 50-60 basis point move observed this week.

Higher bond yields directly affect the value of an interest rate sensitive stock such as a bank, because for valuation purposes it affects the present value due to the larger discounting of future cash flows. Long bond prices and yields move in opposite directions – when the yield goes up the price falls and vice versa.

This bond yield linked valuation phenomenon is depicted graphically below with the Barclays Africa Group share price moving inversely to the R186 bond yield.

Share price is the inverse of the bond yield (1/03/2017) source – MN Ingham

Commodities

Brent Crude oil retreated -0.68%, down 0.34 cents to $52.60/bbl as investors waited for US rig count data that could provide further evidence that US shale production is continuing to grow, adding to the global oil glut. Oil prices had gained momentum this week on a growing perception that OPEC and non-member Russia would extend a production cut, in the hopes of increasing prices.

Gold Bullion firmed slightly by $4.19 to $1 247.67 at the close of the JSE.  This comes after a day of general weakness that saw gold, silver and platinum prices fall between 0.5% - 0.8%. Base metals have softened due to stronger US equity and bond markets as the dollar continues to rebound.

A look ahead to markets next week:

· Monday 3 April: USD ISM manufacturing (March)

· Tuesday 4 April: AUD Reserve Bank of Australia Rate Decision

* This report is from the Trading Desk at EasyEquities, Fin24's latest content partner on equities and market moves.