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Cape Town - After gaining for seven straight weeks the rand lost ground against the US dollar, euro and pound, said Overberg Asset Management (OAM) in its weekly overview notice of the economic and political landscape in South Africa.
OAM noted that the rand was affected by the release of Federal Reserve minutes from its policy meeting.
The rand has strengthened below key resistance at R/$13.50 and is now comfortably below the 50-, 100- and 200-day moving averages.
The rand’s momentum indicators are not confirming the rand’s new lows versus the dollar and therefore a sustained break below R/$13.20 is unlikely.
The rand must break above R/$13.60 to indicate that the bottom has been reached.
South Africa economic review
• The rand broke its winning streak. After gaining for seven straight weeks the rand lost ground against the US dollar, euro and pound from R/$13.44 to 13.47, from R/€15.02 to 15.26, and from R/£17.38 to 17.59. The rand was affected by the release of Federal Reserve minutes from its policy meeting on 26-27 July. Although the Fed remain divided over the near-term direction of monetary policy the minutes suggest a growing keenness to hike interest rates. A Fed tightening could lead to a reversal of the recent capital inflows into SA. Net foreign buying of bonds and equities have increased in August for the month-to-date, to R8.5bn and R3.2bn respectively. Although foreigners have been net sellers of equities for the year-to-date net buying of bonds has increased to R58.8bn.
• Retail sales growth slowed from an elevated 4.5% year-on-year in May to 1.7% in June well below the 3.8% consensus forecast. On a month-on-month basis retail sales contracted in June by -2.0% in sharp contrast to the 3.3% increase in May. The biggest culprits were household furniture, and hardware and paint which fell -10.4% and -1.5% on the month, indicating little appetite for durable goods expenditure. Sales of clothing and textiles also fell by -0.7% on the month while less cyclical sectors showed continued growth including food, beverages and tobacco, and pharmaceuticals with month-on-month gains of 7.5% and 9.2%. In the second quarter (Q2), overall retail sales grew by just 1.1% quarter-on-quarter annualised, undermining the improved contribution to Q2 GDP growth from manufacturing and mining. Retail sales are unlikely to show significant recovery in the second half of the year amid job losses, rising inflation and high levels of indebtedness.
Petrol strike ends
• The three-week strike in the oil refining sector ended after the Chemical, Energy, Paper, Printing, Wood and Allied Workers’ Union (CEPPWAWU) and the National Petroleum Employers’ Association (NPEA) agreed to a two-year wage agreement. Wages will increase 7% in the first year and in the second year by the rate of consumer price inflation plus 1.5%. Potential strike action still hangs over the platinum sector with the Association of Mineworkers and Construction Union (AMCU) demanding R12,500 as a minimum basic wage, which would entail an increase of around 50% for lowest paid employees. Meanwhile, vehicle manufacturers and the National Union of Metalworkers (NUMSA) are engaged in their three-yearly wage negotiations with the potential for a repeat of the strikes which hampered the sector in 2013.
The week ahead
• SA Reserve Bank (SARB) leading indicator: Due Tuesday 23rd August. The SARB leading indicator, which forecasts economic conditions six-to-twelve months ahead, fell in May from 90.9 to 90.8 and according to consensus forecast is expected to remain unchanged in June.
• Consumer price index (CPI): Due Wednesday 24th August. CPI is expected to moderate slightly from 6.3% year-on-year in June to 6.1% in July, according to consensus forecast, helped by the elevated base effect of last year’s comparative figure. However, CPI Is unlikely to break below the SA Reserve Bank’s (SARB) 3-6% target range over the foreseeable future due to the lingering effect of drought-induced food price increases and high administered price increases such as municipal rates and electricity. The SARB expects CPI to remain above the target range until the third quarter 2017.
• Producer price inflation (PPI): Due Thursday 25th August. PPI is expected to increase from 6.7% in June to 7.0% in July according to consensus forecast. The slight acceleration in PPI will contribute to a pick-up in CPI over the remainder of the year.
Technical analysis
• The rand has strengthened below key resistance at R/$13.50 and is now comfortably below the 50-, 100- and 200-day moving averages. The rand’s momentum indicators are not confirming the rand’s new lows versus the dollar and therefore a sustained break below R/$13.20 is unlikely. The rand must break above R/$13.60 to indicate that the bottom has been reached.
• 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.
• 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.
• 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, 900 in turn opening a downside target of 45,000. A break above 54,200 on the JSE All Share index would project an upward move to 60,000 marking a new high for the JSE.
The bottom line
• So-called “risk assets”, which include equities and emerging market currencies, have surged in the past three months. Over the period, the S&P 500 and Nasdaq indices have gained 6.6% and 9.9%. The MSCI World Index has rallied 5.9% and even more impressive is the 15.4% increase in the MSCI Emerging Market Index. The rand has strengthened against the US dollar by 17.0%.
• The party in risk assets may be interrupted this Friday when central bankers from around the world congregate at the Jackson Hole symposium in Wyoming. Fed chair Janet Yellen will make a keynote address, which will be scrutinized for any signals on prospective Fed rate hikes.
Growing appetite for US rate hike
• Recent statements by Fed officials indicate a growing appetite for hiking US interest rates. In the past week, John Williams and Stanley Fischer of the San Francisco Fed and William Dudley of the New York Fed have stated that the US economy is close to reaching its employment and inflation targets, suggesting that a rate hike is imminent.
• Minutes of the Fed’s Federal Open Market Committee (FOMC) policy meeting on 26th and 27th July stated that: “Regarding the near-term outlook, (FOMC) participants generally agreed that the prompt recovery in financial markets following the Brexit vote and the pick-up in job gains in June had alleviated two key uncertainties about the outlook that they had faced at the time of the June meeting.”
• Since the July Fed policy meeting, there has been another strong non-farm payroll report, adding to further evidence of a tightening labour market. The second quarter GDP figures were also released after the last Fed meeting, which although weaker than expected, contained robust private consumption readings.
• Inflationary pressure is gathering pace as the earlier disinflationary effects of a strong dollar and weak oil and commodity prices start to fade. Core consumer price inflation (CPI), excluding energy and food costs which tend to be volatile, was 2.2% year-on-year in July, above the Fed’s 2% target. Services inflation, excluding energy, increased in July by 0.3% month-on-month and 3.1% on the year, driven by rental and medical prices, which increased on a month-on-month basis by 0.3% and 0.5% respectively.
• In the past, Janet Yellen, has tended to respond to hawkish comments by Fed officials with dovish comments of her own. The improving economic outlook raises the likelihood that Yellen will break with tradition and instead pave the way for a September rate hike. A hawkish speech by Janet Yellen on Friday could introduce a period of profit taking in risk assets, including a set-back in the rand’s strong rally. Fed fund futures ascribe a 54% probability of a rate hike by December up from 47% at the end of last week.
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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