Markets WRAP: Rand closes at R14.46/$, after trading between R14.35 and R14.56/$

The rand closed the day at R14.46 to the greenback, averaging R14.35 to R14.56 for most of the day. Earlier TreasuryONE said in a morning note that the dollar had continued to strengthen overnight, while the euro and the pound had recovered slightly. Political pressure, however, was still weighing heavy on the two currencies.

The rand remained stable following the news that Home Affairs minister Malusi Gigaba had resigned, and is still trading around R14.45/$.

OVERVIEW: European stocks and S&P 500 futures recouped some of the previous session’s losses on hopes for progress in the U.S.-China trade dispute, even as Asian shares dropped overall. Crude oil headed for its lowest close this year.

The Stoxx Europe 600 Index rose for the first time in three days, with telecoms leading the way after Vodafone delivered better than expected quarterly results. Contracts on the Dow, Nasdaq and S&P 500 were all firmer. The mood was buoyed after a report that China’s Vice Premier Liu He will visit the U.S. to pave the way for a meeting between the leaders of the two biggest economies later this month, which also supported some commodity currencies.

Key Asian indexes slid with Apple suppliers under pressure after the iPhone maker fell on signs of a deteriorating sales outlook.

WTI oil fell for a twelfth day, the longest losing streak on record after Trump criticised top OPEC producer Saudi Arabia’s plan to cut output.

Treasuries climbed and the dollar held near an 18-month high. Britain’s pound pared losses from the past three days after Prime Minister Theresa May said talks with the European Union were in the “endgame” and data showing U.K. wage growth accelerated. Trade worries have hung over markets for months, clouding the economic outlook and helping compound an ongoing sell-off in equities. While comments from Chinese Premier Li Keqiang in Singapore Tuesday hint at a more optimistic outlook, sentiment overall remains fragile as the Federal Reserve pursues its path of policy normalisation and tech companies continue to slide.

“We always talk about that proverbial wall of worry and that wall right now is pretty high,” David Kudla, chief executive officer of Mainstay Capital Management, said on Bloomberg TV. “We have the issues in China with the growth concerns there, we have the issues in Europe with the battle between Italy and the EU, the U.K. getting ready for Brexit.

There is some guidance lower on earnings, and a Federal Reserve that is going to raise rates.

”Elsewhere, the euro recovered from its weakest level against the dollar since June 2017, with Italy due to resubmit its budget. The country’s bonds pared some losses after a debt auction. Emerging market equities and currencies were steady. - Bloomberg

Andre Botha, Senior Currency Dealer at TreasuryONE said in a morning note to clients, “As we warned yesterday, US holidays are usually a signal for a quiet market day, but every now and again a knee-jerk happens due to low liquidity conditions. Yesterday was one of those days and the rand almost reached R14.5000 against the US dollar. This was due to no fault of our own in the South African sense but rather developments from further a field.

"These developments are the fact the EU will not accept the Italian budget and this could lead to a bit of tug of war between the EU and Italy and second was the real prospect that now resolution will be reached over Brexit. We have seen the pound and euro fall on both of these events and the winner was the US dollar.

"The US dollar breached the 1.13 level against the Euro - its strongest in over a year. This will still be the dominant force in the market today and the rand will take its cue from movements in the greenback. We expect the Rand to stage a bit of a recovery as liquidity returns today, but should the US dollar keep the pressure up, we could see the rand sliding.” 

U.S. stock futures rose after Washington and Beijing were said to have resumed discussions on trade ahead of a planned meeting between the two nation’s leaders later this month.

Telecommunication and travel companies drove European equities higher as Vodafone jumped on better-than-expected earnings and cost-cutting plans. Italy has until the end of Tuesday to resubmit its spending plans, with the government signaling it won’t budge, setting up a political and financial clash.

December contracts on the S&P 500 Index rose as much as 0.8% erasing earlier losses despite the underlying gauge’s 2% slump on Wall Street. Contracts on the Dow Jones Industrial Average were up as much as 0.7%, while those on the Nasdaq 100 rose 1%. The Stoxx Europe 600 Index advanced as much as 0.9%.

China’s Vice Premier Liu He and U.S. Treasury Secretary Steven Mnuchin spoke by phone on Friday, resuming trade talks though it didn’t yield any concrete results, according to people briefed on the matter. The call comes after President Donald Trump asked key officials to begin drafting potential terms for a trade deal to be reached at the Group of 20 nations summit in Argentina later this month.

The South China Morning Post also reported Tuesday that China’s Liu is expected to visit the U.S. for talks aimed at easing trade tensions ahead of a meeting between the two countries. “Buyers are all waiting for clarity on trade. Without it, we get a slow rot into year-end,” said Ken Peng, a Hong Kong-based strategist at Citigroup.

“If there is an agreement, even if something akin to the one with Japan where they just agreed to start negotiating, we’d be ready for a 10% to 20% bounce.”

Still, negative sentiment on Wall Street may persist as the outlook into 2019 has investors fretting. The Nasdaq 100 dropped 35 on Monday, extending its three-day decline past 5%, after major Apple suppliers tumbled as investors feared demand was weakening for one of technology’s most important product lines. - Bloomberg

Emerging markets are already contending with U.S.-China trade tensions, policy tightening in developed countries and a resurgent dollar. So any sudden rebound in oil prices would be exactly what they don’t need right now. But that may be what they get as the year draws to an end. Oil jumped as much as 1.8% on Monday after Saudi Arabia said OPEC and its allies should reverse about half the increase in output they made earlier this year as fears of shortages are supplanted by concerns about oversupply.

Oil futures in New York ended the day 0.4% lower and was down a further 1.4% as of 06:06 in London. With the ascendant dollar keeping many currencies on the back foot, a turnaround for oil would further fuel inflation in the crude-buying emerging markets, raising import bills and forcing central banks to further tighten monetary policy.

It would also weigh on global growth, hitting even those countries that export oil. - Bloomberg

Mobile helps to boost Telkom's revenue, but shareholder earnings down

Telkom on Tuesday released the half-year results ending September 30, 2018.

The group's operating revenue increased by 5.2% to R20.8bn and was boosted by its mobile operations.

However the group's headline earnings per share were down 3.3% to 288c per share. 

The interim dividend is down 5.1% to 112c compared to 118c previously.

The share which opened at R57.28 was trading 3% lower at R55.53 by 09:10.

The sahre which opened

Steinhoff update on US Mattress Firm financial restructuring

Further to Steinhoff's announcement on October 5, 2018 that its subsidiary Mattress Firm Incorporated has filed for financial restructuring, the group provided an update related to another announcement on October 25.

"In conjunction with the Mattress Firm Filing, Mattress Firm also secured certain financing arrangements that come into effect upon completion of the implementation of the plan of reorganisation and Mattress Firm’s exit from the Chapter 11 proceedings that are intended to support its business going forward," the company explained.

The October 25 shareholder notice indicated that on October 24, the High Court of Justice in England and Wales, on, granted Stripes US Holding, Incorporated (SUSHI), a direct subsidiary of Steinhoff Europe, permission to convene a scheme meeting for the creditors affected by the English scheme of arrangement proposed by SUSHI known as the SUSHI Scheme.

The purpose of the meeting was to consider and approve the SUSHI Scheme.

SUSHI has a revolving credit facility under which it owes certain lenders approximately $200m. Under the SUSHI Scheme it is intended that the current SUSHI lenders will exchange their rights under the existing rolling credit facility for similar rights in a new credit rolling loan facility where Steinhoff Europe is to be the borrower and Steinhoff Holdings the guarantor, thereby cancelling the existing rolling credit facility arrangement.

"To this the High Court of Justice in England and Wales has on 12 November 2018 issued an order sanctioning the SUSHI Scheme. Upon lodging of the Scheme Sanction Order with the Registrar of Companies, the SUSHI Scheme shall take effect and be binding on SUSHI, the Scheme Creditors and each Undertaking Party and its successors and assigns," the notice read.

The scheme comes into effect or around November 19, 2018. The group's restructuring will continue in accordance with the lock up agreement entered by the company on July 11. 2018, the notice read. 

WATCH: Bigger bonuses coming for (almost) everyone on Wall Street

ICYMI: Seasonal liquidity crunch is bad news for rand

An expected seasonal dollar-liquidity crunch means the outlook for the rand is anything but merry as the year draws to a close.

Funding requirements of large European and Japanese banks going into year-end, together with the Federal Reserve’s tighter monetary policy, will probably lead to greater demand for dollars and rising offshore funding costs, according to Mehul Daya and Walter de Wet.

That would weigh on the rand, one of the emerging world’s most-traded currencies, they wrote in a note to clients.“Global dollar-liquidity shortages, both structural and seasonal, remain a key risk to the outlook for the rand,” said Daya and De Wet, who correctly predicted in June that South Africa’s currency could weaken to above R14 per dollar as global financial conditions became more restrictive.

“Greater demand for US dollars and rising offshore US dollar funding costs, accompanied by currency volatility, will likely not bode well for the carry trade.”

Tokyo stocks drop more than 3% after Wall Street plunge

Tokyo stocks dived more than 3% shortly after the open on Tuesday, with investors discouraged by a plunge in US shares on fears over demand in the tech sector.

The Nikkei 225 index was down 3.47%, or 771.92 points, at 21 497.96 in early trade, while the broader Topix index was down 3.06 or 51.09 points at 1 620.86.

"The Tokyo market is being hit by the plunge in US shares, and news that Apple's iPhone sales are not going very well is also proving a blow," Hideyuki Suzuki, head of investment information department at SBI Securities, told AFP.

JSE among the worst G20 stock indices overnight

One would have expected the rand to fare better in thin trade yesterday, but the lack of liquidity meant that risk assets were exposed to sudden market movements, head of research at RMB Global Markets Nema Ramkhelawan-Bhana said in a market update.

The local currency pair edged ever-closer to 14.50, which in turn propelled benchmark bonds higher.

The JSE was among the worst performing G20 stock indices overnight, shedding over 2% as smaller trade volumes and a spate of negative corporate news dragged stocks lower.

If the dismal start to Asian bourses are anything to go by, with Japan’s Nikkei down 3.2%, then the local securities exchange is in for another strenuous day.

This doesn’t bode particularly well for the rand with implied 3-month volatility still elevated at around 18%. Given recent price activity, we expect a 20c trading range today.

The absence of event risk in the US emphasised the geopolitical developments playing out across the North Atlantic, as markets weighed up the possibility of the UK acceding to the proposed backstop on the Irish border as part of its Withdrawal Agreement from the EU.

GBP/EUR has provided a strong barometer for market sentiment with the pair’s surge to a six-month high last week, reflecting optimism that a deal would be reached.

Those levels of enthusiasm have started to fade somewhat, with GBP/EUR dropping to 1.1452 as the final stage of talks is proving immensely difficult. 

The euro’s descent against the greenback speaks to scepticism over Italy’s ability to budge on its fiscal plans, with little expected of today’s budget submission. In the absence of radical reform, the EU is likely to publish a negative opinion on Italy’s budget within the next three weeks and recommends that the eurozone’s third largest economy be put into an Excessive Deficit Procedure (EDP).

That would imply greater EU oversight of Italy’s budget and possibly sanctions further down the road.

The anxiety will all be expressed through EUR/USD, which is teetering at 1.12, with EUR/ZAR contained below 16.20.

Emerging markets, though skittish, were less eventful yesterday.

The Argentinian peso held firm despite S&P’s one-notch downgrade of the country’s sovereign rating to B, bringing it in line with Moody’s and Fitch’s credit scores.

Most of the bad news has already been priced in with investors now looking to whether the government can maintain its resolve following the national elections next year.

The irony is that the peso and Turkish lira, which were the harbingers of EM misfortune in August, are among the best performing EM currencies this quarter, securing total returns of 19% and 12.3% since October. T

he rand has been less fortunate but has still outperformed expectations. There are barely any calendar releases of interest today.

Data might be scarce, but energy reports are plentiful with OPEC’s monthly publication and the IEA’s World Energy Outlook 2018 out today.

Given the sensitivity to supply forecasts, any outlandish views could trigger two-way volatility on the Brent crude price, which has dipped below US$70/bbl for the first time in seven months.

South African motorists certainly aren’t complaining about the sudden about-turn in the oil price. 

Dollar hits 16-month high

Bianca Botes, corporate treasury manager at Peregrine Treasury Solutions noted that the dollar's gains yesterday saw it hit a 16-month high.

Emerging markets as a whole tumbled on Monday as both the strong dollar as well as an uptick in the oil price weighed on them, she explained in a market update on Tuesday.

We are keeping a close eye on the US Vice President Mike Pence at the Southeast Asian Nations Summit this week, as we look for additional direction on trade relations between the US and China.

Trade tensions will continue to put pressure on global market currencies, especially the emerging market cluster.  

The rand is slowly weakening against the greenback, as risk appetite in the market diminishes. The range of trade for the day is anticipated at R14.30 to R14.48.

Early morning movements from TreasuryONE:

The dollar continued to strengthen overnight with the euro almost touching 1.1200. The euro and pound have recovered slightly but remain under pressure as political concerns for both weigh on their markets.

US stocks closed sharply lower dragging Asian stocks lower as well. Talk of China’s Vice Premier visiting the US soon has helped Asian markets off their lows but they remain in negative territory.

US Treasury yields were a touch lower  however the Fed hike in December is still priced into the market.

The rand hit 14.4900 in the Far East on the back of the strong dollar but has recovered to be trading at 14.3900 at present.

Gold remains on the back foot at $1204.50 while Oil is lower at $69.37. 

Market indicators at open:

USDZAR 14.4072

EURUSD 1.1241

EURZAR 16.1870

GBPUSD 1.2873

GBPZAR 18.5371

AUDZAR 10.3838

CADZAR 10.8918

CNYZAR 2.0703

ZARJPY 7.9050

CHFZAR 14.2405

Gold  1 203.70 

Plat 846.60 

Plad 1 103.72 

Rhod  2 475.00 

Irid  1 470.00 

Ruth  268.00 

Copp  6 073.75 

Brent  69.42 

Gold ZAR 17 333.28 

Plat ZAR  12 191.04