Markets WRAP: Rand closes at R14.47/$

The rand closed at R14.47 to the greenback on Friday afternoon.

The day's range was between R14.42 to R14.61.

This ahead of an expected credit rating by Moody's later tonight.

Lira traders braced for the results of Turkey’s local elections this Sunday following a week of turmoil that rattled faith in the nation’s markets. While the currency slowed its slide, stocks gained and swap rates began to normalise on Friday, investors warned the volatility could spike again.

Commerzbank AG analysts said they were struggling to gauge how much selling pressure would remain after the vote, which is seen as a key test of Turkish President Recep Tayyip Erdogan’s rule.

TD Securities strategist Cristian Maggio predicted the lira could sink as much as 30% in the second quarter.

“It’s not a market that I think is worth touching right now,” Timothy Graf, the head of EMEA macro strategy at State Street Bank & Trust, said in an interview on Bloomberg TV on Thursday.

“It’s very difficult to short the currency at least, given how expensive that has become.” If investors decide to go long, the market can move against them very quickly, he said.

The lira’s whipsaw ride began last Friday after a surprise drop in central bank reserves prompted JPMorgan Chase & Co. to recommend investors sell the currency, amplifying its decline.

Turkish regulators launched a probe into the bank over the weekend and limits designed to tame short sellers via offshore funding markets kicked in on Monday, propelling swap rates beyond 1 000% and trapping investors in their lira bets.

Exodus Slows

While the restrictions helped the lira recoup losses at the start of the week, bonds and stocks sank as international investors dumped local assets in a bid to raise liras to offset their currency positions.

Meanwhile, local traders sprang into action, scooping up dollars on the cheap and sparking a secondary drop in the lira that continued into Friday’s session.

For now, the exodus has slowed, swap rates are stabilising and the lira is down only 1.5% compared with a slide of more than 5% on Thursday. Other emerging markets like South Africa and Brazil are facing their own local risks and the rout hasn’t broadened.

But the offshore funding freeze has left many despairing and forced to tear up strategies in a market that can turn untradeable so fast. That’s not good for Erdogan who relies on foreign inflows to finance growth of the Middle East’s largest economy which entered into its first recession in a decade in the run-up to Sunday’s municipal elections.

“An adverse outcome for AKP would likely rekindle new market volatility next week,” Commerzbank analysts including Tatha Ghose wrote in a report, referring to Erdogan’s ruling AK Party.

“It remains unclear how much selling pressure remains, which could unfold once the situation on the swap market will normalize completely.” - Bloomberg

OVERVIEW: Stocks climbed globally on Friday to round out a strong quarter while Treasuries declined as investors gauged the growth outlook and hopes for a China trade deal. The pound jumped. Futures on the S&P 500, Nasdaq and Dow Jones all advanced, with US-China trade talks set to continue.

Miners and retailers led the way up in the Stoxx Europe 600 Index, and a gauge of global stocks was headed for its best quarter since 2012. Equities rose across Asia, with Chinese shares posting the biggest gains.

European sovereign bonds were mixed and the euro weakened even as German unemployment fell to a fresh record low. The pound reversed an earlier drop on speculation that some Labour lawmakers could back the Prime Minister’s Brexit plan in a vote later Friday.

Whether the rebound in stocks can spill over into the second quarter may depend on the outcome of trade talks between Chinese and American negotiators, who are said to be working line-by-line through the text of an agreement.

Meanwhile, nerves remain frayed after the inversion of a key part of the US yield curve, with grumblings over Brexit delays in the background. Elsewhere, oil extended gains as the OPEC+ coalition’s production cuts supported prices.

The Turkish lira dropped despite an organised effort to stem losses before elections on Sunday.

Emerging market currencies and shares climbed.

Stocks

The Stoxx Europe 600 Index increased 0.5% as of 07:27 New York time to the highest in more than a week. Futures on the S&P 500 Index climbed 0.4% to the highest in more than a week. The MSCI Asia Pacific Index gained 0.6%. The MSCI Emerging Market Index climbed 0.9% to the highest in a week on the biggest increase in more than a week. 

Currencies

The Bloomberg Dollar Spot Index decreased less than 0.05%. The euro rose 0.1% to $1.1233, the biggest rise in more than a week. The Japanese yen declined 0.2% to 110.80 per dollar, the weakest in more than a week. The British pound gained 0.5%, the biggest advance in a week.

The MSCI Emerging Markets Currency Index jumped 0.3%, the largest climb in more than two weeks. 

Bonds

The yield on 10-year Treasuries increased two basis points to 2.42%. Germany’s 10-year yield jumped two basis points to -0.05%, the largest surge in more than two weeks. Britain’s 10-year yield climbed two basis points to 1.023%, the highest in more than a week on the biggest surge in more than two weeks. 

Commodities

The Bloomberg Commodity Index jumped 0.5%, the biggest increase in more than two weeks. Brent crude gained 1.2% to $68.64 a barrel, the highest in more than 19 weeks on the largest rise in more than a week. LME copper surged 1.6% to $6,459.50 per metric ton, the highest in more than two weeks on the biggest jump in two months. Gold climbed 0.1% to $1,292.13 an ounce. - Bloomberg

Turkey has continued to take a toll on the rand, says Peregrine Treasury Solutions's Bianca Botes while the expected credit rating from Moody's later today will also weigh on the rand depending on the various possible outcomes.

"It was Turkey’s turn for the spotlight as the embattled country prepares for elections this weekend that will challenge the control of President Erdogan. Wednesday evening saw Turkish swap rates soar over 1000% as banks came under pressure to clamp down on liquidity to halt the rapid dumping of the Turkish lira," she said.

"This forced investors to short other Turkish financial instruments as well as turn to other merging market currencies as a proxy for the lira.

"The spillover in the South African market was brutal, with the ZAR retreating against all major currencies, and topping R14.73/$ on Thursday afternoon after trading in the mid R14.20s at the start of the week," she said.

By 10:36, the rand was trading at R14.59 to the greenback.  

"While Turkey’s woes are largely overshadowing the rest of the global market, local pressures continue to contribute to the rand’s turmoil. Even though the lights are on for the time being, load-shedding will form part of the South African environment for the foreseeable future, which will have a devastating ripple effect across all sectors of the economy.  

"Thursday afternoon saw the SA Reserve Bank Monetary Policy Committee announcing that the repo rate would remain at 6.75% and that future inflationary pressures would be largely attributable to higher Eskom tariffs, rising fuel costs, as well as a weaker rand.

"SARB governor Lesetja Kganyago, also warned of the effects of a sluggish global growth environment, as well as the current global market dynamic, listing trade tensions and Brexit as some of the key risk factors. The governor delivered more negative news: that local growth is more subdued than initially anticipated and the growth forecasts have been revised down from 1.7% to 1.3% for 2019.  

"Thursday also saw the release of local PPI figures, rising 4.7% year-on-year in February – marginally higher than the anticipated 4.6%. Today will see the release of the trade balance, expected to indicate a surplus of R2bn.  

"Another key event in store for the local economy today is ratings agency Moody’s rating decision, with four possible outcomes: No downgrade: Moody’s keeps the South African outlook at stable, with no downgrade in the sovereign rating. This announcement would be rand positive in the immediate and short term, however any retracement would be limited by the dominant global environment.

"Outlook changed from stable to negative (most widely expected outcome): Moody’s keeps the sovereign rating unchanged, while the outlook is changed from stable to negative, likely giving SA a stern warning about fiscal expenditure and growth concerns.

"The impact on the currency would likely also be positive in the immediate and short term, however, the change in outlook opens the door for a potential downgrade in November. Downgrade (largely unexpected): Moody’s cuts the sovereign rating, as well as changes the outlook from stable to negative.

"The rand would most likely have a kneejerk reaction in the short term, potentially breaking the R15.00/$ mark. Postponement: Moody’s takes the decision to wait until after the election to make its decision. This would leave the market in limbo, but a small retracement in the currency could be expected.  

"As the election creeps closer, politics in South Africa remains largely subdued, with the normal run-of-the-mill election antics playing out. While an ANC win is largely expected to be market positive, one cannot help but find the list of proposed cabinet members somewhat worrisome, as infamous names implicated in state capture make their appearance.

"We expect the volatility in markets to escalate closer to the election date, with many expecting a strong rebound in the currency post-election."

Asia stocks gain, capping strong quarterly rebound

Adam Haigh, Bloomberg

Asian stocks looked set to round out a strong quarter with gains on Friday, while the rally in sovereign bonds ebbed as investors gauge the outlook for growth. The dollar steadied after a three-day advance.

The MSCI Asia Pacific Index is heading for an 8.6% advance for the quarter, recouping the bulk of the fourth-quarter sell-off.

Chinese shares saw the biggest gains, with the Shanghai Composite up 2.4%. Equities also climbed in Japan, Hong Kong and Korea. US equity futures edged higher.

Australian bonds tracked modest declines in Treasuries.

Meantime, US-China trade talks are set to continue Friday, though negotiations may be prolonged. White House economic adviser Larry Kudlow said the Trump administration is prepared to keep negotiating with Beijing for weeks or even months.

Some of the rebound in equities this quarter has been attributed to the improved prospects for an end to the trade war between the world’s two largest economies.

“Risk assets are being supported right now, in my view, by a dovish Fed, a China stabilisation and better sentiment around geopolitical risks,” said Frances Donald, the head of macroeconomic strategy at Manulife Asset Management. “That probably gives this rally a little bit more juice.”

The Turkish lira earlier sank despite an organised effort to stem losses days before elections. The pound is at the low end of its recent range ahead of another Brexit vote looming in the UK Parliament.