Markets WRAP: Rand closes at R13.96/$ after trading between R13.88 and R14.19

The rand closed at R13.96 to the greenback on Wednesday in what was an eventful day, with the currency averaging between R13.88 and R14.19 on the back of the U.S mid-term elections. TreasuryONE said in a note earlier that the rand remained on the front foot against the softer dollar.

For once, the consensus came true. Markets got it right and no violent repricing in equities was needed. A divisive episode of U.S. politics came and went, and investors are roughly where they were when it began. The question for bulls: can it actually last?

“This was our base case,” said Ben Phillips, chief investment officer of EventShares, referring to a divided U.S. Congress. “As far as markets are concerned, it is actually a decent outcome.” Perhaps. Bulls can celebrate gridlock, at least, a moderate positive in cycles past.

They can be encouraged that something other than a Republican sweep is being taken in stride by futures. The economy is intact. And nothing that happened Tuesday will alter President Donald Trump’s tax cut, which made 2018 one of the best years for profit growth ever recorded.

“I know it may be a bit of a letdown from a news perspective, but most of us on the investment side are happy to see a bit of boring and predictable politics,” said Max Gokhman, head of asset allocation for Pacific Life Fund Advisors.Still, questions remain.

How long can any peace persist in a market that before this week spent a month going up and down 2% a day? The election is over, one type of uncertainty is subdued. But for equity bulls who watched as their favorite stocks got pummeled by forces that went beyond politics in October, it’s an uneasy truce.

“This issue, thank god, is behind us,” said Donald Selkin, chief market strategist at Newbridge Securities. “But the other issues are out there."

Futures on the S&P 500 were up 0.6% as of 08:57 in New York. It was a stark contrast to last week, when equities finished their worst monthly plunge since 2011. That’s the issue for investors, though - that an end to electoral strife doesn’t ensure an end to everything else that tore at investor nerves last month, when $3 trillion was erased from shares.

The Federal Reserve is still raising rates, Trump’s trade war shows no sign of easing, and little will arrest the gnawing sense the economy’s best days are behind it. Add to that a more abstract threat - “tweet risk,” it’s been called - the possibility that a recharged opposition will turn screws on Trump’s vulnerabilities, provoking the president into an even more warlike public posture than he already presents.

It’s an unsavory thought for anyone who traded through the president’s pre and post-market pronouncements as his tariff threats ramped up.

For now, investors were happy to put those concerns aside. The economy may be peaking, but it’s still humming along at a 3% clip. Earnings growth may slow, but earnings are still growing: the estimate is for 10% gains in each of the next two years.

How bad could things be, when after falling 9% in October, the Nasdaq 100 is still up 9% on the year? Even more: in the past 18 midterm elections, stocks have gained from the October lows through the end of the year every single time, according to LPL Research.

One optimistic spin holds that October’s rout wasn’t an isolated event, separate from politics. It was politics, the theory goes - Tuesday’s election outcome was simply priced in about a month in advance.

Under that interpretation, bulls can take solace: the Dow Jones Industrial Average’s 2,000-point correction was the price stocks had to pay for a Republican setback. At Apriem Advisors in Irvine, California, chief investment officer Benjamin Lau lowered cash to 15% from 20 percent just before this election, buying financial and industrial shares to take advantage of cheaper valuations.

“Generally I don’t know if the outcome is going to affect the long-term view of the economy,” Lau said Tuesday night. “We’re more concerned just about uncertainty and once it’s passed, the market is going to do better."

OVERVIEW: The rand firmed by 1.07% on Wednesday afternoon, changing hands at R13.95 to the greenback at 14:26.

Meanwhile, Bloomberg reports that U.S. equity futures jumped, the dollar dropped and Treasuries climbed as investors digested potential political gridlock in the wake of the American midterm elections.

European stocks rallied and Asian shares were mixed. With Democrats winning the House of Representatives majority and Republicans clinching control of the Senate, President Donald Trump’s party loses full control of Congress.

The results dim chances for any major fiscal initiative from the administration that might have pushed yields higher and strengthened the greenback.

The outcome largely matched polling going into the vote, and it’s likely investors will now refocus their attention. The biggest macro theme remains the trade war after recent warnings from major names including the IMF’s Christine Lagarde and Former U.S. Treasury Secretary Hank Paulson. Meanwhile, the Italian government is holding a confidence vote on Wednesday, the Federal Reserve is set to decide interest rates on Thursday, and Theresa May is pushing on with efforts to agree a Brexit deal.

Elsewhere shares of Spanish banks surged after they escaped paying billions of euros in back taxes. The euro rallied as data showed German industrial output picked up steam in September.

The rand was trading at R13.93 to the greenback by 14:00. The rand has continued to rally on Wednesday afternoon following news of the Democratic Party’s House win in the U.S midterm elections.

Jameel Ahmad, the Global Head of Currency Strategy and Market Research at FXTM said in a morning note to client, "The reality of the outcome from the mid-term election results that Democrats will take control of the House while Republicans hold the Senate has not created too much volatility for financial markets. Investors were reasonably well positioned for this outcome before the event, therefore it hasn’t been as much of a nervous few hours for investors as some political events have been in recent history.

"The USD has edged gradually lower against many of its counterparts over the course of this week, with this related to expectations that the Democrats winning some influence could provide some legislative resistance towards Trump further pushing forward pro-America policies.  

"The eventuality that the Democrats have fallen short of achieving a 'blue wave' has prevented the worst-case scenario for financial markets from occurring.

"It was always going to be a long shot due to its unlikely probability, but there were concerns that the Democrats winning control of the Senate would have ramped up the chances of President Trump being impeached. This would have been the most unfavorable outcome for investors despite its low probability, because it would have run the risk of sparking wild financial market volatility and potential black swan events. What matters moving forward is whether this change of play represents enough uncertainty around political “gridlock” that it will weigh on the USD.

"The Greenback itself remains at historically very strong levels and does appear overvalued against many of its global counterparts, however it is not clear whether this result will create enough change to foreign and trade policy decisions that it would encourage investors to seriously unwind USD positions.

"At the moment we do see some near-term pressure on the USD but the jury is very much out for how long this could last. This depends on whether a shift in power could actually influence Trump's policies from being passed through legislation. The Greenback has edged lower against most of its counterparts in Asia at the time of writing, and this form is being replicated across most of the G10 as European trading is set to get underway. But investors would need to see some fundamental shifts that the outcome in the mid-terms could really change matters behind the scenes to receive the needed encouragement to drag the Greenback further lower moving forward."

The rand broke under R14/$ on Wednesday morning on the back of the U.S mid-term election. By 10:17, it was trading at R13.99 averaging between R13.98 and R14.19.

Earlier Andre Botha, Senior Currency Dealer at TreasuryONE said in a morning note to clients:“Waking up this morning it would not be amiss for you to take a double take when looking where the Rand is trading at the moment.

"The Rand has enjoyed the early news from the US where it looks like the Democrats will take the House of Representatives while the Republicans will keep the Senate. As expected the news was a little U. S dollar negative and the Rand has caught some of the tailwinds of that and traded at a low of R14.03 against the US dollar.

Andre Botha, Senior Currency Dealer at TreasuryONE has said, “Waking up this morning it would not be amiss for you to take a double take when looking where the Rand is trading at the moment. The Rand has enjoyed the early news from the US where it looks like the Democrats will take the House of Representatives while the Republicans will keep the Senate.

"As expected, the news was a little US dollar negative and the Rand has caught some of the tailwinds of that and traded at a low of R14.03 against the US dollar. With the US mid-terms on the forefront of events today, we expect choppy trade as news and results get released.

"This means that the Rand will be choppy as the main driver of the market at the moment is the US dollar. We believe that the wave of sentiment will be in the Rand's favour and there is a real possibility that the Rand tests the R14.00 level which opens up a bit more room the downside.

"As we stated above the main focus today will be the US and the movement of the US dollar and we expect the Rand to mirror that movement and trade very choppy today. However, we believe the overall bias is for the Rand to make a charge at the R14.00 level.”

The rand was on a roll on Wednesday morning, trading hands at R14.11 by 09:13.

Bianca Botes, Corporate Treasury Manager at Preregrine Treasury Solutions said in a morning note to clients that the rand staged an impressive overnight performance as the US headed to the voting stations for mid-term elections.

"The rand had bounced off levels of R14.22/$ for most of the day on Tuesday, however during the overnight trade it managed to rally to R14.11 and opened at R14.14 on Wednesday morning. The rand is holding firmly onto its gains, as it wanders in territory last seen in October, while the US dollar remains under pressure. 

"Not too much is happening in terms of local data today, however we will see the market position itself later this afternoon for the interest rate decision from the US Federal Reserve due for announcement tomorrow. The rand is stable this morning, making slow and steady gains against the greenback. The range for the day is expected to be R14.10 to R14.32."

Meanwhile Bloomberg reports that Asian equities and U.S. stock futures surrendered gains as investors mulled any implications for markets from American midterm election results that showed the anticipated split in Congress. The dollar retreated against most major peers and U.S. Treasury yields declined.

"With Democrats on course to win the House of Representatives majority and Republicans effectively clinching control of the Senate, prospects are for divided government. The results dim chances for any major fiscal initiative from President Donald Trump’s administration that might have offered a lift to yields and the greenback.The White House will still have the upper hand on getting key appointments approved in the Senate, with a continued Republican majority in position to limit Democratic efforts to reverse Trump’s regulatory actions. Earlier in the session, stocks emulated the late-2016 Trump-reflation play when Republicans looked to do better this time than some forecast."

Asian markets mostly rose early Wednesday as investors tracked early results from the US midterm elections with Democrats looking on course to win back control of the House, which could impact Donald Trump's legislative agenda.

Equities and the dollar were fluctuating through the morning with results in many key constituencies on a knife-edge with turnout expected to be high.

But, while the vote is the first major electoral test of the Trump's presidency, analysts pointed out that the poll is unlikely to lead to a reversal of the White House's tax cuts and deregulation.

ICYMI

With memories of the volatility which ensued in the aftermath of the US presidential election in November 2016 still fresh in investors’ minds, risk-aversion was high today’s session.

Hong Kong stocks closed firmer as Chinese government officials reiterated that they would push for larger tax cuts in order to help small firms which were facing funding challenges. 

The Shanghai Composite Index dropped 0.6% however the Hang Seng managed to end the day 0.72% firmer.On the currency market, the US dollar was relatively weaker ahead of the US mid-term elections.

Emerging market currencies including the rand, were trading relatively flat in cautious trade. The rand did weaken to a session low of R14.28/$ but it rebounded to trade at R14.20/$ just at 17.00 CAT.

Rand may break below R14/$

In the US midterm elections it is almost certain that the Democrats will win back the House from the Republicans. The Republicans will hold onto the Senate, TreasuryONE said in a market snapshot on Wednesday morning.

US equities ended up overnight and Asian stocks also in the green today. The rally in emerging market currencies continue with the Indian Rupiah staging its biggest gain in a single day in the past 3 years.

The USD is on the backfoot a little and EUR and most other majors gaining. Locally the ZAR has also benefited and is trading at R14.05 currently, after having opened at R14.11. TreasuryONE expects the rand to test below the R14.00 level.

Bianca Botes, Corporate Treasury Manager at Peregrine Treasury Solutions, noted that overnight the rand rallied to R14.11. "The rand is holding firmly onto its gains, as it wanders in territory last seen in October, while the US dollar remains under pressure," she said.

Not too much is happening in terms of local data today, however we will see the market position itself later this afternoon for the interest rate decision from the US Federal Reserve due for announcement tomorrow, Botes said.  

The rand is stable this morning, making slow and steady gains against the greenback. The range for the day is expected to be R14.10 to R14.32.  

Market indicators from TreasuryONE:

USDZAR 14.0301

EURUSD 1.1461

EURZAR 16.0719

GBPUSD 1.3131

GBPZAR 18.4137

AUDZAR 10.1948

CADZAR 10.7006

CNYZAR 2.0229

ZARJPY 8.0559

CHFZAR 14.0245

Gold 1 229.41 

Plat 873.90 

Plad 1 115.10 

Rhod 2 415.00 

Irid 1 470.00 

Ruth 268.00 

Copp 6 184.00 

Brent 72.06 

Gold ZAR 17 240.14 

Plat ZAR 12 254.79