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Markets WRAP: Rand closes the day at R14.35/$

2018-12-11 07:58

TreasuryONE said in a morning note earlier that the rand had started the day on the backfoot and remained the weakest emerging market currency.

Global stocks rebound. (Photo: iStock)

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Last Updated at 06:52
11 Dec 14:35

Bloomberg reports that the rand is reasserting itself as the wild child of emerging markets. The currency’s price swings have been the widest among 24 of its peers in the past week as risk assets have been rocked by everything from concern over the US-China trade dispute to Britain’s Brexit confusion. In that time, the rand has shed 3.5% against the dollar. The rand is also climbing back up the implied volatility ladder. After being overtaken by Turkey’s lira in May, the rand’s one-week implied volatility against the dollar is now a hair’s breadth away from regaining the top spot. Its expected price swings briefly surpassed the lira’s on November 28 before dropping back again.

11 Dec 13:29

The pound is vulnerable to further pressure as traders weigh the possibility of the UK crashing out of the European Union without a deal. Sterling fell to the lowest since April 2017 on Monday as Prime Minister Theresa May postponed a key vote in Parliament to approve her EU withdrawal agreement and vowed to step up preparations for a no-deal exit, investors’ biggest fear.

The currency has since retraced some losses but strategists don’t see much reason for optimism heading into the Christmas holiday.

Here’s what analysts and fund managers had to say after Monday’s announcement:


“With the uncertainty set to remain high in the coming days, the pound is likely to remain on tenterhooks as in the absence of clarity, the market reaction is by default to sell,” wrote strategists including Alexandre Dolci in emailed comments. “The biggest risk for sterling, and also for the euro, remains a disorderly exit but all options remain open including a new election or even a second referendum.” Continuing uncertainty limits any potential retracement, after cable fell back below $1.26 temporarily and with EUR/GBP remaining above 0.90. The option market has taken a more sanguine view, as GBP implied volatilities have only been marginally raised and GBP puts have not really become more expensive.

AMP Capital Investors

“It’s a mess - in a world of turmoil, Brexit has become a bit of comic relief, it’s like a British comedy,” said Shane Oliver, head of investment strategy at the Sydney-based asset manager.“

It’s more than two years now since the Brexit vote and most of that time leaders have taken to arguing among themselves.” The pound may fall to $1.20 as the vote delay has increased the uncertainty over Brexit. “I’ll say stay away for now. It’s just too hard to trade the pound. You can’t really trade it on technicals because it’s driven by political announcements that flip and flop.”

BlueBay Asset Management LLP

“We are now at a crisis point, the UK is now in a very difficult situation,” according to portfolio manager Mark Bathgate. BlueBay is shorting both the pound and gilts on the basis that gilts will also be weighed in the medium term by factors including currency-induced inflation and slowing growth. The EU is unlikely to re-open withdrawal agreement negotiations and the current deal won’t get through Parliament, said Bathgate, who sees the pound heading back to 2016 lows.

Unicredit SpA

“Although the political scenario in Britain has become even more fluid, uncertain and complicated, renewed pressure on sterling is unlikely to fade quickly,” wrote strategists including Roberto Mialich See GBP/USD exposed to a further selloff below $1.25 and EUR/GBP “potentially trading further above the 0.90 threshold.” Expect EU to refuse to re-open the withdrawal agreement, at least before the UK parliament has voted on it, and believe that the best that May can hope for from the bloc is a letter of assurance that the Irish border backstop will be temporary.

“This is unlikely to be enough to persuade Conservative Brexiteers and the DUP to support the deal,” the strategists add.

Credit Agricole

The threat of a no-deal Brexit “leaves us hopeful that a Brexit deal that is acceptable for both the UK and the EU would be found before long,” strategists including Valentin Marinov wrote in a research note. They see the pound recovering and stick with a constructive view versus dollar and euro over a six-month horizon. - Bloomberg

11 Dec 12:10

OVERVIEW: Stocks were mixed on Tuesday, with European shares rallying while US futures and Asian shares slipped as investors weighed the prospects for success in American-Chinese trade talks. The pound rebounded. Miners and builders led the advance in the Stoxx Europe 600 Index, which was playing catch up to a late recovery for shares in the US on Monday.

Futures on the Dow Jones, S&P 500 and Nasdaq indexes were all lower, tracking the Asian benchmark after a drop for Japanese equities. The pound rallied, trimming some losses from a day earlier as gilt yields climbed. The dollar edged lower with Treasuries as European sovereign bonds fell. News that Chinese Vice Premier Liu He discussed a timetable for trade talks with Treasury Secretary Steven Mnuchin helped to bolster sentiment somewhat. Yet investors also have an eye on the continuing flap over Canada’s arrest of the chief financial officer of Huawei. And among a plethora of political risks, the UK is seeking reassurances from European partners over Brexit and a French protest movement may spread.

“Markets are highly volatile,” said hedge-fund pioneer Paul Tudor Jones at a conference in New York. “I can easily see a situation in 2019 where all the deleveraging that we’ve experienced in the last month and a half - really, the last four or five months - all that deleveraging gets reinvested back into the market.”

Elsewhere, India’s assets saw a choppy session, with stocks and the currency initially roiled by a surprise resignation of the central bank governor on Monday, before posting a recovery as traders mulled the implications for Prime Minister Narendra Modi of regional election results.

Emerging-market currencies and shares were steady. Oil traded little changed and most metals climbed. - Bloomberg

11 Dec 10:49

Andre Botha, Senior Dealer at TreasuryONE said in a morning note to clients,“The rand had a tough time yesterday with the local unit trading all the way to 14.4800 in evening trade. The reason for this dramatic sell-off ranges from trade tensions between the US and China to global growth concerns and locally the effect that load shedding will have on the economy and whether Eskom will have another bail-out, which will have potential credit rating after effects.

"The overall notion is that Emerging Markets are under a bit of pressure due to international events and the rand more so due to local factors and its dubious title of EM proxy currency, which means it’s on either end of the spectrum in times of EM volatility, either the weakest or the strongest depending on sentiment.

"Other international news is that Britain Prime Minister Theresa May kicked the Brexit decision down the road by delaying the parliamentary vote due to fear that it will be rejected. This has ruffled the feathers of the British pound, and we have seen the pound losing significant ground against all currencies and we expect the pound to trade with a considerable amount of volatility as headlines of the Brexit decision gets released in the next few months.

"The basis is for EM’s to lose some ground as the risk sentiment is currently risk averse and with no real market moving data out today, we might ride the sentiment wave today.”

By 10:50, the rand was changing hands at R14.41/$.

11 Dec 09:44

Decline in construction activity

The FNB/BER Civil Confidence Index remained below 20 for the sixth straight quarter, rising by one point to 18 in the fourth quarter, FNB senior economic analyst Jason Muscat highlighted in a report.

The current index level means that more than 80% of respondents are dissatisfied with prevailing business conditions. "While confidence remained stable at a very low level, growth in construction activity deteriorated noticeably. This is on top of falling demand for the most part of the last 18 months," said Muscat.

Data from Stats SA showed that the real value of construction works declined by an annual rate of 3.6% in the third quarter following a 0.5% annual drop in the second quarter. These results suggest a similar, possibly even worse, performance in the fourth quarter. 

"Civil construction activity likely declined this quarter with no sign of improving over the short-term. A very downbeat outlook indeed," said Muscat.

With the scarcity of work, tendering competition also eased, for the second consecutive quarter, he noted. "It is surprising to see that the intensity of price competition in the sector has continued to diminish. However, it is unlikely to continue, given the state of activity growth and the outlook," said Muscat.  

"It is difficult to conceive a further, and potentially steeper, fall in construction activity after the declines already experienced over the past few quarters. 

"However, that is what the Q4 survey results suggest. This means that the economy is yet to see any real benefit from President Ramaphosa’s key focus on stimulating fixed investment," Muscat concluded.

11 Dec 09:38

Emerging markets rattled

Emerging markets are being thrown about by the White House’s flip-flopping on its tariff stance against China with advisors within the Trump administration providing conflicting reports on the potential outcome of trade talks, RMBGlobal Research head Nema Ramkhelawan-Bhana said in a market update.

Beijing has added fuel to the fire by threatening to retaliate in response to the arrest of Huawei’s CFO, Meng Wanzhou. The Canadian dollar has sold off 1.5% since Meng was taken into custody in Vancouver on 1 December, with authorities fearing retribution in the form of sanctions or stricter regulatory requirements for Canadian businesses operating in China.

China’s show of force could escalate if Meng is extradited to the US, derailing any positive momentum in US-Sino trade negotiations.

The “perhaps-never” scenario on a trade resolution has occasioned a sell-off in risk assets on many occasions this year.

This scenario worsened yesterday with the unexpected resignation of India’s Central Bank governor after a dispute with the government (a blow to monetary policy credibility), with the MSCI measure of EM currencies down 11% since yesterday’s close.

Like many instances this year, the “perhaps-never” scenario on a trade resolution has occasioned a sell-off in risk assets, which was worsened yesterday by the unexpected resignation of India’s Central Bank governor after a dispute with the government (a blow to monetary policy credibility), with the MSCI measure of EM currencies down 11% since yesterday’s close.

Understandably, commodity-linked currencies have been worst hit with the rand losing substantial ground against the US dollar and the euro.

After subsiding to below 15.0 at the end of November, one-month implied volatility on USD/ZAR has ascended to just below 19.0, reflecting renewed risk aversion. Given market sensitivities to the prevailing geopolitical environment and the gradual thinning of trading volumes into year-end, we expect the rand to be vulnerable to big moves, akin to the last few trading days, with USD/ZAR14.50 well in sight.

If it’s any consolation, the local unit is holding steady against the ill-fated pound, which is merely a conduit for Brexit-related concerns.

With the UK parliamentary vote being deferred for fear that is would be rejected altogether, the probability of a no-deal is rising fast. In an absurd twist of fate, the European Court of Justice has ruled that Britain can unilaterally halt the formal process of leaving the EU, which is all-the-more confusing.

It falls to the Prime Minister to provide guidance on the way forward, which is as clear as mud. The extent to which the local market prices for these types of geopolitical risks will perhaps lessen as we gravitate towards the 2019 presidential elections as domestic risks become more prevalent.

The latest election poll released by the Institute of Race Relations, following a survey conducted in September, shows that support for the ANC is tracking towards 60%, but the Institute cautions that there are several variables at play.

Speculation as to voter turnout and the magnitude of support for the competing parties will run rife ahead of the polls. What matters is the extent of policy certainty thereafter.  

What is on the cards for today? Locally, we have October’s mining and manufacturing data scheduled for release — expect positive prints on both, but remember that the monthly numbers tend to be volatile.

11 Dec 08:00

After ugly year, biggest Africa stock market may be set to rally

It’s been a rough year for South African stocks, but signals are emerging that they’re set for a rebound in 2019.

Cheap valuations, flows into US exchange-traded funds and optimism among global analysts are some of the factors that suggest South Africa’s $445bn equities market may recover from its worst year in the past decade

11 Dec 08:00

Dollar gains on UK's Brexit woes

The dollar is firmer this morning with the DXY Dollar index up at 97.15. The Dollar gained support from Theresa May’s decision to postpone Tuesday’s key Brexit Parliamentary vote which put the pound under heavy pressure and pushing it to a 21 month low - TreasuryONE noted in a snap update on Tuesday morning.

The pound is currently at 1.2575 and the euro at 1.1367. 

The rand tracked the pound and we saw the currency fall to 14.4757 at one stage yesterday. The rand is slightly better this morning at 14.3700 but remains the weakest emerging market currency.

Wall Street closed marginally up as news of continued US China trade talks despite the diplomatic row over the arrest of the Huawei CFO.

Gold has slipped off it’s highs and is at $1247.25 this morning. Oil is also lower at $60.14. 

Opening indicators from TreasuryONE:

USDZAR 13.6979

EURUSD 1.1350

EURZAR 15.5394

GBPUSD 1.2719

GBPZAR 17.4137

AUDZAR 10.0903

CADZAR 10.3862

CNYZAR 1.9882

ZARJPY 8.2812

CHFZAR 13.7323

R186 8.91%

US 10 Year 3.02%

JSE 3.17%

FTSE 1.47%

S&P 500 1.04%

Gold 1 233.31 

Plat 802.90 

Plad 1 205.00 

Rhod 2 590.00 

Irid 1 470.00 

Ruth 268.00 

Copp 6 306.65 

Brent 61.51 

Gold ZAR 16 885.37 

Plat ZAR 10 952.88 

11 Dec 08:00

Markets in disarray as Brexit vote postponed

"The tension in the market is palpable following the postponement of today’s Brexit vote by UK prime Minister May, leaving the markets in further disarray as the pound trades to a 20-month low," Bianca Botes, corporate treasury manager at Peregrine Treasury Solutions said in a market update on Tuesday morning.

"The turbulent terrain that both Brexit and the US-China trade tension has caused, places the entire emerging market on a unequal footing as the sell-off prompted by investor risk aversion continues at full steam."

Botes pointed out that although there are data releases today - markets would be dominated by "politicians and their antics". 

"We can continue to expect a bumpy ride in the rand, although the set-back in the pound can add some relief during trade this morning.  

"The rand’s momentum is certainly on the downside, with a range of R14.25 to R14.45 on the cards for Tuesday," she said.

Data due to be released include SA's gold, mining and manufacturing statistics, the UK will release employment data and the US will release PPI data.

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