Markets WRAP: Rand closes at R14.60/$

The rand closed at R14.60/$ on Thursday. Here's how the day wrapped up:

USDZAR 14.6073

EURUSD 1.1247

EURZAR 16.4192

GBPUSD 1.3195

GBPZAR 19.2647

AUDZAR 10.3310

CADZAR 10.8752

CNYZAR 2.1701

ARJPY 7.5565

CHFZAR 14.6675

R186 8.73%

US 10 Year 2.37%

JSE 1.03%

FTSE -0.07%

S&P 500 -0.31%

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Mike Ashley weighs offer valuing Debenhams at $81m

Billionaire Mike Ashley, vying with creditors for control of Debenhams, is considering an offer that would value the troubled U.K. department-store chain’s equity at $81m.Ashley’s Sports Direct International, which already owns about 30 percent of Debenhams, said it’s weighing a bid worth 5 pence a share in cash.

Before going firm on his offer, Ashley is demanding that Debenhams name him chief executive officer and halt a loan process, due to finish Thursday, that would lead to greater control for the company’s lenders.

The possible bid ratchets up the struggle for Debenhams, a fixture of the U.K.’s shopping streets that’s fallen on hard times as consumers buy more online and confront the economic vagaries of Brexit. It’s the latest of Ashley’s attempts to wrest control of the retailer and save his stake after offering two spurned loans and proposing last week to buy its profitable Danish stores for 100 million pounds.

“Ashley’s scattergun approach shows how desperate he is to protect his stake,” Neill Keaney, an analyst at CreditSights in London, said in a telephone interview. “This potential offer for the equity is now a final throw of the dice, but it doesn’t do anything to tackle Debenhams’s debt issues.”

Sports Direct’s offer is more than double Tuesday’s closing share price, but the stock has fallen about 90 percent over the past 12 months as the company seeks a rescue. The shares almost doubled early Wednesday in London before paring gains to 52 percent at 1:30 p.m.

Shareholders “are sick and tired of being ignored, cast aside and trampled underfoot by the lenders of Debenhams who through the incompetence, or worse collusion, of the board, are allowing these critical stakeholders in the business to be wiped out,” Chris Wootton, Sports Direct’s deputy chief financial officer, said in an email. “This is the shareholders’ chance to fight back.”

Houlihan Lokey, a financial services firm that advises Debenhams’s lenders, declined to comment. A Debenhams representative declined to comment.

The retailer said Tuesday that it would consider any offer from Ashley, but that he’d have to address its immediate funding requirements and repay up to 560 million pounds of debt. - Bloomberg

SARB likely to keep interest rates on hold

Bianca Botes, Corporate Treasury Manager at Peregrine Treasury Solutions, said in a snap note on Wednesday afternoon that while interest rates were likely to remain unchanged for now, this may not be the case later in the year.

"While SARB likely to keep interest rates on hold, the South African Reserve Bank (SARB) is not expected to make any changes to interest rates following the Monetary Policy Committee meeting on Thursday, but rising inflation will likely see SARB raise interest rates later in the year," Botes said.

"While the Consumer Price Index (CPI) crept slightly higher to 4.1% in February from 4.0% in January, inflation still remains within the 3-6% target range at this stage.  

"However, Eskom’s 9.41% electricity tariff hike, increasing fuel prices and a weaker ZAR will contribute to growing inflationary pressure over the next few months."

The third and fourth quarter of 2019 will then see inflation test the upper end of the band, likely resulting in interest rate hikes, Botes said.  

That said, an interest rate hike would lead to a stronger rand, but SARB will need to be patient and cautious in its approach if it is to avoid creating a “stagflationary” environment, Botes added.

Meanwhile, she said, poor investment sentiment, coupled with high levels of foreign debt obligations, continue to weigh on Turkey, even as the Central Bank steps in to stabilise the lira. The rand is currently trading at R14.65/$.  

Fund managers have a lot to be anxious about other than the never-ending Brexit saga. With just over two weeks to go until the UK is due to formally leave the European Union and an exit deal still proving elusive, US- based Eaton Vance Management and OppenheimerFunds Inc. are more focused on the dovish pivot among central banks, $10 trillion of negative-yielding debt and simmering trade tensions between the world’s two largest economies.

This is in contrast to 2016, when the Brexit referendum was a seismic shift for markets around the world, with the pound sliding by the most on record to a 30-year low.

The vote reverberated across regions and asset classes and was seen heralding an anti-establishment wave in Western economies. Fears on what the ascent of populism would mean for Europe were followed by Donald Trump’s surprise victory in the US election a few months later.

“A day after the referendum, Brexit was seen as a global event, then a few months into it, it became a European event, and now it’s really a local event,’’ said Alessio de Longis, a fund manager at Oppenheimer.

“Ultimately, unless you are a day-to-day trader, for medium to long-term investors all that matters with politics, headlines and all these other developments, is really - ‘What does that do to fundamentals? What is that doing to growth and other macro variables?’’’

The result of the 2016 EU referendum roiled global markets, wiping out about $3 trillion in stock-market value and sparking demand for haven assets from US Treasuries to gold. Now there is a new stampede for havens, with yields on 10-year US bonds falling to the lowest in more than 15 months, but the driver is a worrying global economic outlook.

Brexit plays a “very small role” in his current allocation decisions, said De Longis, who is buying Treasuries for a firm with $229 billion under management.

In Asia, fund managers from Sydney to Singapore are trying to gauge if Brexit will still have a knock-on effect on their region, but many are finding it too tricky to buy UK assets. Even for those investing in the pound, the currency’s moves are now underwhelming predictions by market strategists. Sterling has been little changed this week, defying expectations for a 1% rally as lawmakers seized control of the Brexit process from Prime Minister Theresa May.

Parliament is set to vote Wednesday on options that could include canceling Brexit or holding a second referendum. Rajeev De Mello, chief investment officer at Bank of Singapore, isn’t taking a position in sterling or gilts even though the repercussions could hurt Europe and then flow “through across the world including emerging markets where I invest.”

While Brexit could affect European Central Bank policies and in turn global bond yields, including Australia’s, from a risk-reward perspective it is best to avoid positioning for specific Brexit outcomes, according to Tamar Hamlyn, the co-founder of Sydney-based Ardea Investment Management.

If Britain’s exit had triggered an exodus of other countries from the EU, that would have been a reason for markets to panic, according to Boston-based Andrew Szczurowski, a fund manager at Eaton Vance.

As that hasn’t been the case and the US economy is shielded from it, the saga seems to be losing its impact.

“Obviously markets back in June of 2016 freaked out when the initial Brexit vote happened but since then it seems like we’ve been dealing with this for a number of years and the world hasn’t ended,’’ Szczurowski said. - Bloomberg

OVERVIEW: Treasuries climbed with European government bonds as investors weighed a worrying economic outlook against a decisive turn towards accommodation by major central banks.

Stocks in Europe drifted along with US equity futures. The Stoxx Europe 600 index fluctuated, with declines in utilities and food companies offsetting gains for carmakers.

Futures on the S&P 500 pared an advance. Asian markets were mixed, though Chinese shares pushed higher as a burst of diplomacy suggests Beijing and Washington remain determined to de-escalate their eight-month trade dispute.

The New Zealand dollar slid more than 1% after the central bank joined the global shift away from higher interest rates. The Aussie also retreated. The US dollar advanced for a second day.

With mounting signs of a weaker economic outlook, global investors are favoring fixed-income as central banks, led by the Federal Reserve, back away from monetary tightening. That’s driven down yields, pushed bonds higher and helped stabilise corporate borrowing costs. Like the Fed, traders are parsing through softer data on the world’s biggest economy, from housing to retail sales and consumer sentiment. The resumption of high-level US-Sino trade talks this week offers a spark of hope. Speculation that the Fed will need to consider lowering rates appears to have spread, with some - such as Legg Mason unit Brandywine Global Investment Management - even forecasting a cut this year.

Stephen Moore, President Donald Trump’s pick for an open Fed board seat, said in an interview with the New York Times that the central bank should immediately cut rates by half a percentage point.

“The money-market curve is telling us that the Federal Reserve needs to do more,” Francis Scotland, director for global macro research at Brandywine, told Bloomberg TV in Hong Kong. The outcome of US-China trade talks and any developments in Britain’s tortuous exit from the European Union could help determine sentiment from here. The pound wobbled as a key Brexit hardliner indicated he’s willing to back Theresa May’s departure deal. Elsewhere, West Texas oil held onto gains in the previous session and was set to record its strongest first quarter since 2002 after Russia, the world’s second-biggest crude exporter, said it was on track with output cuts and disruptions to refiners along the Houston Ship Channel added to supply concerns.

These are the main moves in markets:

Stocks

The Stoxx Europe 600 Index fell less than 0.05% as of 08:50 London time. Futures on the S&P 500 Index rose 0.1%. Germany’s DAX Index rose 0.1%. The MSCI Asia Pacific Index fell 0.2%. The Euro Stoxx 50 Volatility Index rose 0.5%. 

Currencies

The Bloomberg Dollar Spot Index rose 0.1%. The euro rose 0.1% to $1.1277, the largest advance in a week. The British pound fell 0.1% to $1.3193. New Zealand’s dollar declined 1.4% on the largest decrease in seven weeks. The Australian dollar fell 0.4%, the biggest drop in almost two weeks. 

Bonds

The yield on 10-year Treasuries fell four basis points to 2.39%. Japan’s 10-year yield fell less than one basis point to -0.067%. Germany’s 10-year yield fell two basis points to -0.04%. New Zealand’s 10-year yield decreased 11 basis points and the biggest dip in more than two years. Australia’s 10-year yield fell five basis points. 

Commodities

Brent crude rose 0.1% to $68.05 a barrel, the highest in a week. Iron ore dipped less than 0.05% to $82.10 per metric ton. Gold gained less than 0.05% to $1,316.26 an ounce. - Bloomberg

US and Chinese officials resume high-level trade talks this week as they close in on a deal that could just be the first step in the long road to economic peace.

President Donald Trump’s top trade negotiator, Robert Lighthizer, and Treasury Secretary Steven Mnuchin are due to visit Beijing on Thursday and Friday, while top Chinese negotiator, Vice Premier Liu He, plans to travel to the US the following week.

The burst of diplomacy suggests both sides remain determined to reach an agreement that would avoid any escalation of the eight-month trade war that has seen them impose duties on $360 billion of each others’ imports. In a radio interview this week, Lighthizer said he wants to get a deal, but he’s “not necessarily hopeful” one will happen.

“We’re working on it,” Lighthizer told National Public Radio. “If there’s a great deal to be gotten, we’ll get it. If not, we’ll find another plan.” US negotiators have voiced concern that China is backtracking on earlier pledges, while officials in Beijing have shown resistance to proposals that they see as one-sided.

Plans for a meeting between Trump and Chinese President Xi Jinping to finalise an agreement has been pushed back by at least a month to late-April, at earliest.

2020 Desperation

“The president is desperate for a deal,” said Clark Packard, trade-policy counsel at the R Street Institute, a think tank based in Washington. “I don’t think he wants to go into 2020, running for re-election, without something here.” But it’s looking increasingly doubtful that the ideal scenario for investors and business leaders - complete removal of the tariffs - will come to pass. Trump said last week he plans to keep tariffs on Chinese products until he’s sure Beijing is complying with any deal, citing concern that it hasn’t lived up to previous commitments. The question of whether to roll back existing tariffs will probably be one of the final, and trickiest, issues to resolve, and it’s likely some of the duties will remain in place, said Tim Keeler, an attorney at Mayer Brown who served as chief of staff to former US Trade Representative Susan Schwab.

Serious Negotiations

“Trade negotiations that are good and serious take longer than people want or predict,” Keeler said. “This one’s taking longer than people want or predict.” Even after a deal is signed, trade relations between the two powers will likely remain tense for some time as they search for a new equilibrium in their economic relationship. Zhou Xiaochuan, the former head of China’s central bank, sounded an optimistic note at an event in Boao, Hainan Province on Wednesday, and said he believed the two sides could resolve their issues through negotiation. 

Trump stoked optimism about a major breakthrough late last month, when he withdrew a threat to ratchet up tariffs and suggested he and Xi could celebrate a deal at a “signing summit.” Since then, Trump walked away from a meeting with North Korean leader Kim Jong Un, and warned it’s possible he’d do the same with Xi if things didn’t go his way.

The president told Republican lawmakers on Tuesday that he won’t settle for less than an “excellent deal" with China, according to Senator Marco Rubio, who attended the briefing.

Trade Truce

Some market strategists have already been counting on an extended truce, rather than a wholesale reversal of the tariffs. In a research note early this month, Goldman Sachs economists said their base case was that any deal “would leave some US tariffs in place, potentially lifting them in stages as various commitments under the agreement have been met.”

BNP Paribas echoes that view. In a note, rates strategist Laurence Mutkin and oil economist Harry Tchilinguirian predicted the negotiations would end in tariff “stabilisation,” with some US duties still in place.

"We expect tensions to persist even after these deals are reached, as political leaders jockey for commercial advantage abroad and political points at home.” The two countries are still struggling to bridge gaps on substance. Some US negotiators are concerned that China is pushing back against American demands in trade talks, according to people familiar with the negotiations.

Chinese officials have scaled back promises on key issues such as intellectual-property policies after failing to receive assurances from the Trump administration that the US will roll back existing tariffs, the people said. Beijing has played down the chances of a currency commitment solely by China, and it has also said that any enforcement mechanism in a deal must be “two-way, fair and equal”. - Bloomberg

The rand continued to see saw, struggling to retain momentum in either direction, Corporate Treasury Manager at Peregrine Treasury Solutions Bianca Botes said.

"An uptick in the dollar coupled with a slowdown in the Asian market rally in the overnight session are both adding pressure to the local unit, with global growth concerns remaining the key theme this week.

"Markets are gearing up for the local Monetary Policy Committee interest rate announcement tomorrow and, while no change is expected, the tone of the SARB (SA Reserve Bank) will be important as inflation fears, driven by fuel and tariff hikes, loom," she said.

Botes said statements by the European Central Bank will also be taken into consideration today as the EU struggles to gain any meaningful economic traction.

The US trade balance is also expected to add to the mix this afternoon, she said. 

Botes said the rand was expected to trade within a range of R14.38 and R14.56.

By 08:04, it was trading at R14.45 to the greenback.

TreasuryONE, in a morning note, had similar sentiments particularly in terms of the MPC.

"The SARB MPC meeting starts today and the consensus is for interest rates to be kept on hold. Markets' main focus will remain on the Moody’s review in two days' time," it said.

"The dollar is broadly stronger this morning despite poor economic data out of the States yesterday. US Housing Starts and Consumer Confidence numbers both declined but ongoing global growth concerns and negative sentiment towards Europe have driven the dollar higher.

"The euro has slipped to 1.1260 and the pound is at 1.3185 while the rand is weaker at 14.4575

"Global stocks with the exception of the Nikkei all closed up while US Treasury yields are a touch up from their recent lows. Gold is lower this morning while Brent has climbed to $68.14 on news of Russian output cuts."