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Markets WRAP: Rand closes at R14.28/$, after trading between R14.27 and R14.47/$

2018-11-14 08:22

The rand, along with other emerging market currencies, firmed on the back of the weaker dollar.

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Last Updated at 21:40
14 Nov 17:13
The rand closed the day at R14.28 to the greenback on Wednesday, averaging between R14.27 and R14.47. The rand, along with other emerging market currencies, strengthened on the back of the weaker dollar.

14 Nov 16:46

Volatility in the pound jumped as traders looked ahead to the next hurdles on the path toward a Brexit deal. Overnight volatility in the pound against the dollar climbed to the highest level in more than a year as Prime Minister Theresa May’s Cabinet meets Wednesday to decide on a draft Brexit deal struck with the European Union. One-, two- and three-month measures of price swings also rose, suggesting investors expect uncertainty to continue.

“Following months of intense negotiations, the U.K. and EU negotiators have agreed on a text for a Brexit deal that would address the thorniest issues of all - the question about a post-Brexit Irish border,”Credit Agricole SA strategists including Valentin Marinov wrote in a research note. “Some uncertainty will likely linger before and after today’s Cabinet meeting and this may cap investors’ appetite for the pound."

Sterling slipped to $1.2936 as of 14:16 in London, after swinging between a gain to $1.3036 and a drop to $1.2886. Sterling jumped 1% versus the dollar Tuesday after the U.K. and the EU agreed on the draft text.

Implied volatility, a measure of price swings, on the overnight tenor in pound-dollar climbed to almost 25% earlier Wednesday, touching the highest level since June 2017 on the risk that May’s Cabinet doesn’t back her plans. The Cabinet meeting was due to start at 14:00 in London Wednesday. Short-dated options were also supported as traders turned their attention to a Parliament vote on the Brexit deal that could come within weeks, which could boost the odds of no deal and even lead to a general election.

Some strategists said the market will likely have to wait for the Parliament vote for a significant rally in the pound, though Nomura Internationa lstrategist Jordan Rochester forecast sterling may rise as much as 2% to $1.3250 if the Cabinet is convinced of May’s deal later Wednesday.

Others are more downbeat. Even the Parliament vote won’t be the end of sterling volatility, according to Royal Bank of Canada strategist Adam Cole. With the exit from Europe set for March 29, “much of the longer-term uncertainty will remain unresolved and domestic political risk is arguably simply being pushed to the other side of the exit date,” he said.

He sees Euroskeptic ministers backing the prime minister to ensure Brexit is delivered, but “once we are out, they will be unleashed.” - Bloomberg


14 Nov 15:58
The rand firmed by more than 1% on Wednesday afternoon, trading at R14.30 to the greenback by 15:47. In a note, TreasuryONE said the dollar had been on the backfoot for the day, with market currencies benefitting. The rand, ruble and other emerging currencies are all trading better. The euro is also trading above 1.13 up from 1.1220 yesterday. 

14 Nov 14:25

Investors have gone from contemplating the prospect of oil at $100 to sub-$50 in less than two months. No wonder global markets are playing catch-up. From stocks and bonds to currencies, assets worldwide are gripped by a crude awakening.

Monday saw oil’s largest one-day drop in three years, securing its longest losing streak on record. Early trading jitters on Wednesday suggest the sell-off may not be over, even as West Texas Intermediate swung between gains and losses.

The Stoxx Europe 600 Index dropped on Wednesday, with oil and gas companies among the big losers. There could be more pain in store. The performance of energy shares relative to the broader index has yet to hit year-to-date lows despite elevated price swings in the oil-market complex. In the U.S., energy stocks were the biggest drag on the S&P 500 Index on Tuesday as the benchmark gauge reversed a gain of more than 1% to finish in the red. The jump in volatility of the oil price will feed into already bruised U.S. stocks, according to Macro Risk Advisors.

About $80 million flowed out of the SPDR S&P Oil and Gas Exploration and Production exchange-traded fund, ticker XOP, on Tuesday. That was the third day of withdrawals and the largest in more than two weeks.

Short interest in XOP is at its highest in more than a year, with nearly a quarter of shares outstanding lent out. The ETF tracks an equal-weighted basket of U.S. oil and gas firms.

The corporate bond market had taken the slide in crude on the chin but Tuesday’s rout may force investors to pay closer attention. U.S. investment-grade debt was already facing the worst year since 2008, and energy securities make up some 15% of the BBB rated universe.The energy sector also accounts for about 15% of the entire U.S. high-yield bond index - that gauge posted the biggest drop in six weeks on Tuesday.

However, as Ye Xie of Bloomberg’s Markets Live blog notes, a regression of oil prices and the high-yield credit spread since 2010 shows that WTI between $50 and $70 looks like a sweet spot for junk bonds. The spread tends to widen below $45, his analysis shows.

Meanwhile, tumbling prices are undercutting market gauges of headline inflation expectations in Germany and the U.S., close to notching 2018 lows. Any slowdown in price growth could mean a less hawkish outlook for monetary policy.

Emerging Impact

Declining oil is a two-sided coin for the collection of assets and economies classed as emerging markets. Many of the countries, such as Gulf nations like Saudi Arabia, are energy exporters that suffer when prices decline. Others, like Turkey and India, have to import fuels and so benefit from cheaper energy. After a torrid few months, India’s rupee rallied to the highest in almost two months on Wednesday. Forwards for the Saudi riyal jumped for the second time in a month, indicating traders are betting the currency - which is pegged to the dollar but trades in a narrow range - is set to weaken. Still, the link between oil and currencies is far from straightforward, with Russia’s ruble defying the latest downdraft. In fact, the historic relationship between exchange rates of some of the world’s biggest crude exporters and oil prices has been gradually breaking over the past year.

The impact for other emerging assets may have more to do with the signals oil is sending on global growth. If price declines are driven by shifts in demand, it suggests a slowdown - bad news for developing nations. If the slide is based on increasing supply, the consequences for EM are less clear-cut.

Unfortunately for investors, in the current rout it’s a bit of both. No wonder the correlation between oil prices and the MSCI Emerging Market Index of stocks varies wildly. - Bloomberg


14 Nov 12:55

Oil’s record losing streak has plunged prices into a bear market and is reverberating around the globe, with the mayhem rattling everyone from bond traders to political leaders and fund managers. As they seek answers for what’s in store for prices, they may do well to watch these potential flashpoints for clues on crude’s future.

Supply Standoff

The U.S. decision to grant waivers that will allow importers of Iranian oil to keep buying in spite of sanctions confounded expectations of a looming supply crunch, helping trigger crude’s collapse. While OPEC and its allies including Russia had been pumping more in anticipation of Iran’s exports falling to zero, de facto group leader Saudi Arabia now says the producers should reverse about half the output increases they made earlier this year.

President Donald Trump has tweeted that they shouldn’t cut production, setting up a standoff between the U.S. administration and OPEC before it meets in Vienna on December 6. Will the Saudis still push for cuts and will its allies fall in line? Or will the risk of Trump’s ire persuade them to desist? Investors should also keep an eye on shale fields in the U.S., where drillers have continued to increase the number of drilling rigs. Companies usually set capital spending plans months in advance, and production comes online months after drilling begins, so the gain in America’s output - already at record levels - may continue to have tailwinds for the near future.

Greenback Gains

The dollar rose this week to the strongest level in 18 months against a basket of foreign currencies. Since oil is traded worldwide in the U.S. currency, it’s made petroleum pricier for emerging economies to buy in local denominations. While global benchmark Brent crude priced in the greenback is now down on the year, it’s still up 11% in Indian rupees and 14% in Brazilian reals. That’s weighing on demand in what are typically strong growth markets for oil consumption.The dollar could get even more support next month if the U.S. Federal Reserve raises interest rates to cool an economy with the lowest unemployment rate since the 1960s. The probability of a December hike is hovering around 75%, based on trading in federal funds futures, and most Fed officials have said they support further gradual rate increases.

Refining Returns

In a worrying sign for demand, profits from processing crude into fuel for cars have plunged to their lowest level in at least three years, following the end of the peak summer driving season. Poorer returns from making gasoline have weighed on lighter crudes like Brent that yield a higher proportion of such petroleum products, as the incentive for refining weakens. To be sure, Asian refiners enjoyed healthy margins for diesel ahead of colder winter months and more industrial activity in China, which bought a record amount of crude last month and is boosting stimulus measures to cushion the impact of a trade with the U.S. That strength is showing up in Brent’s shrinking premium over heavier and more sulfurous Dubai oil, which is at the lowest in 15 months.

Plastic Un-fantastic

Some of the pressure on refiners is coming from weakness in the petrochemical sector, which accounts for 12% of global crude demand. Asian producers of ethylene, one of the key building blocks used to manufacture everything from plastic bags to toys, are being squeezed by new U.S. plants that use ethane, a by-product of shale gas, instead of oil-derived naphtha.The petrochemical sector is also feeling the heat from the U.S.-China trade war. Utilization rates at factories in the Asian nation producing polyester are slowing amid uncertainty over further tariffs on American imports of Chinese textiles, according to Tracey Zhou, a senior consultant at Wood Mackenzie in Shanghai.

Fund Fallout

Hedge funds have slashed their net-long positions on crude in New York to the lowest level since September 2017, extending a decline for nine straight weeks. Bullish bets for American barrels have fallen more than 65% since January when they reached a record high, as fears of a domestic supply glut and higher stockpiles spooked money managers. A reversal could be a sign of broader investor confidence re-emerging in crude.

Technical Targets

ICE Brent crude in London settled below its lower Bollinger Band this week after breaching a key 50% Fibonacci retracement support level in early November. The 14-day Relative Strength Index, meanwhile, stood at its lowest level in more than three years as the global marker sank deeper into “oversold” territory. A sudden u-turn in prices, however, isn’t expected to be around the corner based on an analysis of Bollinger bandwidths. The gap currently stands at its widest in almost two years - backed by high levels of price turbulence in the past weeks - indicating the likelihood of lower volatility in coming sessions. West Texas Intermediate oil was little changed at $55.74 a barrel at 10:29 in London after falling in each of the previous 12 sessions, a record losing streak. Brent crude was at $65.89 a barrel, over 20% lower than in early October. - Bloomberg


14 Nov 10:33

European stocks dropped on Wednesday, outpacing losses in Asia and U.S. futures as investors weighed the rout in oil prices, a mixed bag of data on China’s economy and the latest trade developments. The dollar and Treasuries were steady.

The Stoxx Europe 600 Index was dragged down by energy shares as good news for the auto sector wasn’t enough to offset the impact of lower oil. Energy producers also weighed in Australia, where equities underperformed.

Japanese stocks came off their highs of the day, while shares declined in Hong Kong, China and South Korea. West Texas crude edged lower, threatening to extend its already record losing streak to an unprecedented 13 days.

The pound fluctuated as traders wait to see if Theresa May can persuade colleagues to back her Brexit deal. Treasury yields were flat and the dollar remained near an 18-month high. Italian bonds fell after the government submitted a defiant budget to the European Commission on Tuesday.

The oil rout has arrived at an already challenging time for global equities, which have been digesting a downturn in the tech sector, the ongoing trade spat between the two biggest economies as well as a higher-rate regime.

With the Trump administration said to be holding off on imposing new tariffs on automobiles there is ground for some optimism, but Brexit and Italian risks linger, American inflation data is out Wednesday and key reports on the crude market are also imminent.Focus will also turn to Federal Reserve Chair Jerome Powell, who speaks Wednesday, with some observers expecting him to calm worries about the central bank pushing its interest rate-hike cycle too far.

That comes after the latest read on China’s economy, where retail sales missed estimates, though industrial production held up. Elsewhere, India’s rupee rallied to an almost two-month high and its sovereign bonds advanced as the slump in oil prices deepened, easing investor concerns over the oil-importing nation’s current-account deficit. Emerging-market equities slipped. Gold was steady. - Bloomberg


14 Nov 09:54

Oil's plunge knocks wind out of Wall Street - Bloomberg

Plunging oil prices and a weakened Boeing knocked the wind of out Wall Street on Tuesday, ending hopes of a quick rebound from Monday's sell-off.

Elsewhere, global equities markets offered a mixed picture but were mostly higher despite headwinds from Brexit talks and Italy's budget talks.

London underperformed after the European Union published contingency plans for a "no-deal" Brexit. A deal was announced just after the closing bell on a "technical level" and was to go before the British Cabinet on Wednesday.


14 Nov 09:52

MTN moves closer to resolving $10.1bn Nigeria dispute - Bloomberg

The MTN Group is making “steady progress” with Nigerian authorities in talks about $10.1bn in claims, encouraging Africa’s largest wireless carrier that it can settle the long-running dispute out of court.

The South African company is in ongoing discussions with Nigeria’s central bank and other institutions and is “narrowing down what the key issues are,” Chief Executive Officer Rob Shuter said in an interview in Cape Town on Tuesday. 


14 Nov 08:25

Rand stable in early trade 

The rand traded in a tight 10c range throughout Tuesday as a quiet global landscape protected it against too much volatility, while trading in the unit remains fairly stable at R14.44/$ this morning.

Turning towards the economic calendar, South Africa is due to release retail sales today. However, given the current economic climate, the figures are expected to remain subdued. 

Abroad, Donald Trump’s appeal to OPEC not to cut oil supply saw the oil price nosedive to a one-year low yesterday, which is welcome news for the South African consumer in light of the steep fuel price hikes the country has recently suffered. 

- Bianca Botes of Peregrine Treasury Solutions


14 Nov 08:23

Asian energy firms take a beating 

Asian energy firms took another battering on Wednesday after oil prices suffered their worst day in three years, while the region's equity markets fell into negative territory.

The pound enjoyed some support after Britain and the EU said they had reached a draft Brexit deal, though observers were cautious as it faces a number of hurdles before being given the green light.

Both main crude contracts plunged on Tuesday - Brent lost 6.6% and WTI 7.1% - on oversupply fears just as demand falters in the face of the China-US trade war and easing economic growth.


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