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Rand gains on optimism of ANC election losses

Cape Town - Market optimism that ANC election losses will prompt a change in the party’s leadership has boosted the rand, said Overberg Asset Management in its weekly overview notice of the economic and political landscape in South Africa.

Local government elections take place on Wednesday 3 August. The election results will come in on Thursday with final results likely to be announced on Friday.

The polls indicate that the ANC’s majority at a national level is set to slip further amid an increasingly unpopular president, divided party, and weak economy.

Growing uncertainty among the ANC electorate will exacerbate apathy of ANC voters while the potential for big gains will encourage voter turnout amongst opposition voters.

South Africa economic review

• The rand continued its gains for a fifth straight week, boosted by a larger than expected trade surplus for June and weak US GDP data which pushes back the timing for Fed rate tightening. Market optimism that ANC election losses will prompt a change in the party’s leadership has helped the rand’s performance in recent weeks. Over the week the rand appreciated against the US dollar, euro and pound from R/$14.32 to 13.86, from R/€15.72 to 15.50, and from R/£18.74 to 18.41. The rand also gained versus most emerging market currencies, appreciating against the Mexican peso (+2.4%), Argentinian peso (+0.9%), Brazilian real (+1.1%), Indian rupee (+0.4%), Malaysian ringgit (+0.8%), Indonesian rupiah (+0.5%), and Philippian peso (+0.7%). The ten-year R186 government bond yield fell slightly from 8.80% to 8.74%.

• The Barclays manufacturing purchasing managers’ index (PMI) fell slightly from an elevated 53.7 in June to 52.5 in July, although still firmly above the key 50-level which demarcates expansion from contraction. Although, among the sub-indices, the business activity index fell from 54.3 to 49.5 other indices performed strongly. The forward-looking new orders index increased from 54.3 to 54.4 and the future conditions index, measuring expected conditions in six months’ time, increased from 52.9 to 55.4. The employment index gained from 50.1 to 52.6 its highest level in over six years. Meanwhile the prices index fell from 81.4 to 72.1 indicating an easing in inflationary pressure. The overall data reinforces the recent trend of above-50 PMI, consistent with solid annualised growth in manufacturing output of around 4.5-5.5%.

• The trade surplus fell from R18.4bn in May to R12.5bn in June but well above the R8.8bn forecast. A decline had been expected following May’s all-time record and with its exclusion the June surplus would have been the highest since late 2010. In June vegetable and machinery exports increased on a month-on-month basis by 20% and 4.0%. Precious metal exports fell -3.0%, which is nonetheless impressive given the 49.1% increase in May. The improving trade data may prompt economists to lower their current account deficit forecast for 2016.

• The prices of unleaded and leaded petrol will be drop on Wednesday 3rd August by 99 cents per litre amounting to a significant 7.6% month-on-month decline. The fuel price cut, enabled by lower oil prices and a stronger rand, will have positive repercussions for inflation. Consumer price inflation (CPI), after rebounding from 6.1% year-on-year in May to 6.3% in June is likely to decelerate during July and August to 5.9% back within the SA Reserve Bank 3-6% target range. Although the inflationary respite is likely to be short-lived with CPI expected to move back above 6% at the end of the year due to the base effect of comparatively weak year-ago readings, there should be a sustainable return to target range by mid-2017.

The week ahead

• Local government elections: Due Wednesday 3rd August. The election results will come in on Thursday 4th August with final results likely to be announced on Friday 5th. The polls indicate that the ANC’s majority at a national level is set to slip further amid an increasingly unpopular president, divided party, and weak economy. Growing uncertainty among the ANC electorate will exacerbate apathy of ANC voters while the potential for big gains will encourage voter turnout amongst opposition voters.

• Electricity production and consumption growth: Due Thursday 4th August. Eskom has been able to produce more electricity in recent months as more units come on-stream at Kusile and Medupi power stations. Electricity, generated and available for distribution, increased in May by 1.0% year-on-year. A similar growth rate is expected in June. However, the lack of power outages may also be attributed to falling consumption, which in May fell by -0.8% on the year.

Technical analysis

• The rand has rallied sharply following the Brexit vote and the ensuing likelihood that the Fed will refrain from hiking interest rates until 2017. The rand has strengthened below key resistance at R/$14.15 opening targets of R/$13.75 and R/$13.50. The rand is now comfortably below the 50-, 100- and 200-day moving averages. A sustained push below all three would indicate a major trend reversal.

• The US dollar index is testing a major 30-year resistance line, which if broken will pave the way for further strong gains in the currency.

• Following the Brexit vote the British pound hit its weakest level against the US dollar since 1985. The £/$1.30 level provides key support, which if broken would open up a Fibonacci projected target of £/$1.20-1.24.

• The long-term JPMorgan global bond index bull trend remains intact, with the yield targeting a new low during the fifth and final wave.

Major bull trend in US bonds likely to continue

• The US 10-year Treasury yield has broken below key resistance levels of 1.6% confirming that the major bull trend in US bonds is likely to continue as the deleveraging phase is still in its early stages.

• The benchmark R186 SA Gilt yield has compressed to its lowest level since “Nenegate” last year falling below key resistance at 9.0%. The yield is now testing the bottom of the current consolidation channel at 8.5%, which if broken will target a yield of 8.0%.

• The MSCI World Equity index has broken downward from a rising trend-line which has been intact since the 2008/09 global financial crisis. Given the magnitude and duration of the 2009-2015 bull market the overall correction is likely to reach a downside target for the MSCI World Equity index of 1 400.

• Since the 1950s the Dow Jones and S&P 500 have displayed 7-year up-cycles and the top of the current US equity cycle is likely to have just occurred. The next major wave down will complete the 16-17 year secular bear market that started in 2000. The secular bottom should occur between mid-2016 and mid-2017.

Market in danger of correction?

• The S&P 500 index has broken to new record highs but the rally is not being confirmed by momentum indicators, which suggests the market is overbought and in danger of correction. A further negative signal is that the Dow Jones Transport Index, traditionally a lead indicator for the broader market, is underperforming the broader index.

• Despite this year’s price rally Brent crude’s break below the key $30 support level in February suggests a continuation of the weakening long-term trend to a downside $25 target. Copper is regarded a reliable lead indicator for industrial commodity prices and barometer of global economic growth. Despite its recent rally the copper price broke below the key $4 500 support level in February suggesting further downside ahead.  

• Gold has developed an inverse “head and shoulders” pattern, which indicates further upward momentum and a test of the $1 400 target level.

• The JSE All Share index is testing an important resistance line but if this remains unbroken the index is likely to move back below the 24-month moving average at 50 700 in turn opening a downside target of 45 000 and an ultimate target of 43 000.

The bottom line

• SA’s local government elections on 3rd August are expected to be the most closely contested since the country’s democratic transition. In the 2004 national elections the ANC held 69.69% of the national vote, falling to 65.7% and then 62.0% in the 2006 and 2011 local government elections.

• In 2011 the ANC lost just one of the eight metropolitan municipalities (metros), losing Cape Town to the DA. According to the latest IPSOS poll the DA continues to have an unassailable lead in Cape Town, and the ANC is losing its majority support in three additional metros.

• IPSOS’s latest poll shows that compared with the previous week the DA stayed ahead at 42% in Nelson Mandela Bay (Port Elizabeth), while the ANC moved from 27% to 28%. In Tshwane (Pretoria), the DA moved from 39% to 40% and the ANC from 25% to 23%. In Johannesburg the DA moved from 35% to 36% leaving the ANC unchanged at 31%.

• The results will be come in on Thursday 4th August with final results likely to be announced on Friday 5th. The polls indicate that the ANC’s majority at a national level is set to slip further amid an increasingly unpopular president, divided party, and weak economy. Growing uncertainty among the ANC electorate will exacerbate apathy of ANC voters while the potential for big gains will encourage voter turnout amongst opposition voters.

Election results may prompt unrest

• After the election results are announced, local councils will have two weeks to announce coalition governments. While the DA could potentially form coalition governments in Nelson Mandela Bay and Tshwane without the EFF, a coalition between the two parties is a distinct possibility for Johannesburg.

• Market optimism that ANC election losses will prompt a change in the party’s leadership has helped the rand’s performance in recent weeks.

• However, the election poses significant risks including the willingness of parties and voters to accept the election results. After 22 years with a virtual monopoly on power ANC losses may prompt unrest.

• The results may usher-in a change in ANC leadership but this will likely be preceded by increased factional infighting within the party. Local government coalition negotiations, especially between unlikely partners such as the DA and EFF, also contain significant risk.

• While the rand has appreciated sharply since the start of the year against the US dollar, sterling and euro with respective gains of +6.78%, +8.69% and +5.99% in the past month alone, the risk of unrest in the post-election period may cause some of this currency outperformance to unravel.

For the full report, including a look at international markets, click here.

* Overberg Asset Management (OAM) is an Authorised Financial Services Provider No. 783. Overberg specialises in the private management of local and global discretionary portfolios as well as pension products.

Disclaimer: Information and opinions presented in this report were obtained or derived from public sources that Overberg Asset Management believes are reliable but makes no representations as to their accuracy or completeness. Any opinions, forecasts or estimates herein constitute a judgement as at the date of this Report and should not be relied upon. There can be no assurance that future results or events will be consistent with any such opinions, forecasts or estimates. Furthermore, Overberg Asset Management accepts no responsibility or liability for any loss arising from the use of or reliance placed upon the material presented in this report.

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