Markets WRAP: The rand closes at R14.22/$

The rand closed at R14.22 to the greenback on Tuesday afternoon.

The day's range was between R14.19 and R14.35.

TreasuryONE said earlier the rand was likely to remain in the R14.15/R14.45 range ahead of the announcement of the country's new cabinet.

Yuan's calm enhances glass-half-full feeling in emerging markets

Justin Carrigan, Bloomberg

If the yuan is the weather vane for the current mood, then bargain hunters might suddenly sense an opportunity. The Chinese currency’s six-day decline screeched to a halt today after Monday’s nerve-jangling 1% slide, as the central bank set its fixing higher than traders expected.

It strengthened offshore by as much as 0.4% before drifting back a bit later.

Finding foothold

Meantime, the so-called emerging-market proxy-trades such as the rand and Mexican peso were comfortably in the green. Stocks, where much of the risk-off pain has manifested itself recently, were down but not out, with the MSCI Index retreating 0.4% compared with the S&P 500’s 2.4% slump yesterday.

With S&P futures and the developed markets of Europe rising, the market may be finding its footing, with traders apparently taking their cue from President Donald Trump’s pledge to meet his Chinese counterpart, Xi Jinping, at next month’s G-20 summit.

While the resurgence of trade tensions erased this year’s gains for emerging-market carry traders, it has also left Asian currencies looking quite juicy.

The implied carry in the region’s exchange rates including the yuan jumped to a seven-month high on Monday.

Lira needs more Turkey’s lira gained after Bloomberg News reported that the government is considering a request to delay the planned purchase of a Russian missile system. Remember the currency rallied as much as 3.8% on Friday after Bild said Turkey had canceled the order altogether, only for the government to deny the claim later.

As it was, Russia dismissed today’s report too.

Bloomberg’s Istanbul-based emerging-markets editor Constantine Courcoulas says traders may want to see more than a mere delay if the lira is to gain traction from here, given they have a generous array of other reasons to bet against the currency right now.

Baht brightens

The baht reached its strongest level since the end of February, evidently drawing further support from speculation the US will expand the number of countries it scrutinises for currency manipulation to include Thailand. But there are several other factors underpinning a performance that’s making the baht one of the few emerging-market winners this month.

According to Roong Sanguanruang, a market analyst at Bank of Ayudhya in Bangkok, limited room for central bank interest-rate cuts and progress toward choosing a prime minister after the disputed March election are providing additional tailwinds.

Throw in a possible boost from MSCI’s re-balancing of its emerging market index and the stars are aligning once again for the baht in a month when it has historically tended to weaken.

Watch the merval

If the Saudi stock-market rally is anything to go by, Argentina is set for a rebound today following MSCI’s announcement yesterday on which companies from each country will be included in its equity benchmarks from May 28.

Saudi Arabia’s Tadawul Index snapped an eight-day losing streak that had left it at its lowest since January. For what it’s worth, Argentina’s Merval lost 3.3% yesterday, sliding back through its 50-day moving average. The question is whether it will be enough to counter all the other nervousness surrounding Argentina at the moment.

Nissan reaches 'rock bottom' on dividend cut, decade-low profit

Nissan predicted annual operating profit below even the most pessimistic analyst’s estimate and cut its dividend for the first time in a decade, giving partner Renault SA a potential opening to push for greater control over their automaking alliance.

Hurt by slumping US sales, aging vehicle models and an out-of-sync product cycle, the Japanese automaker issued an outlook for profit of 230 billion yen ($2.1 billion) for the fiscal year ending March 2020, roughly half of the average projection for 453 billion yen. Nissan also reported its lowest annual profit in a decade at 318 billion yen.

Emerging market stocks and currencies are in for a bumpy ride on the back of the US-China trade war, says Overberg Asset Management's Nick Downing and Carel la Cock.

"There has been a flight from risky assets since last week when US president, Donald Trump, upped the stakes in the ongoing US-China trade talks. Increased trade uncertainty has prompted investors to move assets to relative safe havens and out of emerging markets (EM), impacting both the EM bourses and the currencies.

"Risk pricing gathered momentum on Monday, exacerbated by China announcing tariffs on $60 billion of US imports. On the day, Taiwan and South Korea’s stock markets lost 1.6% and 1.3% respectively as investors outlook on these export-dominated economies soured. US Treasury yields were pushed lower and the Japanese yen strengthened by 0.9%, both countries seen as safe havens.

"Of the emerging market currencies, the Turkish lira was the poorest performer losing 1.9% to the dollar. The broad MSCI FX index fell by 0.7%. Michael Hanson, head of global macro strategy at TD Securities, predicts that the Chinese renminbi will weaken by as much as 5 to 6% and would act 'as a shock absorber to the economic impact of heavier tariffs'.

"With the escalation in the US-China trade war and with no resolution in sight, it could be a bumpy road ahead for emerging market stocks and currencies."

President Donald Trump has repeatedly portrayed the punitive tariffs he has imposed on China and other countries as tools to create leverage and draw them into new trade deals that benefit the US.

Increasingly, however, it is looking like Trump’s tariffs are here to stay and more tangible than any of the deals the president has promised. And that, economists agree, bodes badly for the US and global economies. With his move to raise tariffs on $200 billion in Chinese imports last week and to order up plans for tariffs on all further trade from China, Trump has deployed import taxes on a scale not seen in decades, with some economists reaching as far back as the 19th century for comparisons.

He has also threatened more to come with a May 18 deadline looming for him to make a decision on whether to proceed with new tariffs on imported cars and parts. In tweets and other public utterances in recent days Trump has repeatedly hailed his tariffs, claiming they have helped power US economic growth and repeated over and over again that other countries such as China pay the bill, a view even his own economic advisers are uncomfortable defending.

“The unexpectedly good first quarter 3.2% GDP was greatly helped by Tariffs from China. Some people just don’t get it!’’ Trump tweeted Monday. In some cases, Trump is displaying a preference for his tariffs over his own deals. Among the major hurdles to a congressional vote to ratify his renegotiated version of the North American Free Trade Agreement are the steel and aluminum tariffs that Trump imposed on products coming from Canada and Mexico.

Those tariffs have invited retaliation against US agricultural exports such as corn and pork that are hurting US farmers. They also have caused senior Republicans like Chuck Grassley, the powerful head of the Senate Finance Committee, to say they will block any vote for Trump’s re-branded Nafta, the US-Mexico-Canada Agreement. But the administration has refused to bend and remove the tariffs unless Canada and Mexico agree to other trade restraints with new investment in domestic steel mills and aluminium smelters one of the benefits of Trump’s trade wars the president is most eager to tout.

“Deals, deals, deals. The real deal is standing up to foreigners who have been eating our lunch from his perspective. And that means imposing tariffs,’’ said Gary Hufbauer of the Peterson Institute for International Economics .The biggest risk remains that Trump’s tariffs will be greeted by yet more retaliation from China and other countries.

‘Law of the Jungle’

On Monday, China laid out plans for an increase of tariffs by as much as 25% on some $60 billion in imports from the US. The EU has also said it will retaliate quickly against any US auto duties with the bloc’s trade commissioner, Cecilia Malmstrom, on Monday accusing Trump of taking a “law of the jungle’’ approach to trade. Hufbauer and others argue such an escalation in a tit-for-tat tariff war would hurt not just the US economy but the global economy as a whole.

While the direct impact of tariffs might seem manageable - Hufbauer’s own back-of-the-envelope calculation is that tariffs on all Chinese imports would cost US households roughly $2 000 per year in higher prices - a broader economic slowdown would be far more painful. Trump’s claim that his tariffs have boosted US growth is based in part on what economists say was a transitory drop in imports related to the stockpiling by US companies at the end of last year of goods facing possible higher tariffs.

Advocates of tariffs also claim they encourage domestic investment and thus pay long-term dividends.

Put to the Test

With his tariffs, Trump has launched the world’s largest economy into a live-fire experiment to see if that is true. Or whether what most economists see as the lessons of history still hold. Most economists argue tariffs lead to higher costs for American consumers and companies while also hitting growth overseas, a toxic mix for the US that could even tip it into recession.

“I’m with most economists and I think tariffs and a reduction in free trade are going to be a bad outcome for all involved and not just the US,’’ said Stephen Gallagher, chief US economist at Societe General SA in New York. In a note to investors this week Gallagher argued that an extension of a 25% tariff to all imports from China could lop 0.5 percentage point off U.S. growth. There’s another looming tariff reality also worth considering, Hufbauer said. The politics of tariffs and the vested interests they create mean tariffs are easier to impose than to remove.

Lifting his steel tariffs or any of those he has aimed at China already seems increasingly difficult for Trump. One sticking point in negotiations with China has been Trump’s refusal to remove existing tariffs if and when a deal is struck, something Beijing insists on. But eliminating tariffs may also be hard for anyone who succeeds Trump, said Hufbauer. The best example of why that is, according to Hufbauer, is the 25% tariff that has long protected light trucks in the U.S. from foreign competition. It was introduced in the 1960s to retaliate against European measures aimed at American poultry and has survived multiple US presidencies. Ergo the name of a once temporary measure that decades later seems awfully permanent: the chicken tax. - Bloomberg

US futures, Europe stocks gain as Asia peers dip

Andreea Papuc and Yakob Peterseil, Bloomberg

US equity futures rose alongside European stocks on Tuesday while shares in Asia dropped as investors assessed the prospects for global trade in the wake of a brutal start to the week for markets.

Haven assets including Treasuries, gold and the yen dipped.

Contracts on the S&P 500, Dow and Nasdaq indexes all climbed after President Donald Trump predicted that talks with China will be “very successful” even as the US prepares to hit the country with fresh tariffs.

The Stoxx Europe 600 Index also rose, with automakers leading the gain.

In Asia, shares in Shanghai posted a modest decline, while Hong Kong equities slumped as the market re-opened after a holiday. Japan’s Topix index closed down, though it pared most of an earlier decline. Ten-year Treasury yields edged higher.

The trade tussle between Washington and Beijing is keeping markets on edge, as investors fear a bigger breakdown would increase the likelihood of damage to global growth.

On Monday, all three major US benchmarks ended more than 2% lower - only the second time this year that’s happened - after China targeted some of the biggest US exporters in response to American tariffs.

The new penalties also took aim at American farmers, driving down soybean and cotton prices.

“Our expectation is that an agreement is made, but the challenge then becomes the governance of that agreement,” Liam Spillane, head of emerging-markets debt at Aviva Investors, said in an interview in Sydney.

“That’s positive - global growth and global trade shouldn’t suffer too much - but we’re likely to still be in a period where we are going to get headline volatility that relates to the compliance” after any deal, he said.

Elsewhere, oil edged higher as investors weighed potential disruption to demand from the trade spat against geopolitical tension in the Middle East that threatens supply.

MTN is raising R8bn in Nigeria for expansion

MTN Group's Nigerian unit plans to raise about R8bn this year from a variety of sources including bank loans and bonds to expand operations in its biggest market.

The funds will enable Africa’s largest wireless carrier to finance capital expenditure to increase the reach and efficiency of its network in Nigeria, Chief Financial Officer Adekunle Awobodu said by phone from Lagos.

MTN has also started the process of listing its shares on the Nigerian Stock Exchange.

Stock sell-off moderates in Asia, yen declines

Andreea Papuc, Bloomberg

The global stock slide continued in Asia Tuesday, though with signs of some moderation as investors retained bets that the US and China will ultimately reach a trade deal.

The yen dropped and the yuan rose. While the S&P 500 Index slumped 2.4% Monday in the wake of China’s retaliation on American goods, Japan’s Topix index trimmed a slide of much as 2.1% Tuesday, and South Korea’s Kospi reversed declines. Chinese shares had modest losses.

Hong Kong equities fell more than 1% as the market re-opened after a holiday. The offshore yuan clawed back some of Monday’s slump, as did S&P 500 futures, after President Donald Trump said he has a feeling that talks with China will be “very successful.”

Ten-year Treasury yields hovered near the lowest level since late March.

The yuan’s advance came after a front-page article in a newspaper backed by the People’s Bank of China cited analysts saying that the currency won’t weaken continuously or by a large amount.

In one of his remarks Monday, Trump said that in three or four weeks it will be clear if the talks with China are successful.

"Our expectation is that an agreement is made, but the challenge then becomes the governance of that agreement," Liam Spillane, head of emerging-markets debt at Aviva Investors, said in an interview in Sydney. “That’s positive - global growth and global trade shouldn’t suffer too much - but we’re likely to still be in a period where we are going to get headline volatility that relates to the compliance” after any deal, he said.

On Monday, all three major US benchmarks ended more than 2% lower, only the second time this year that’s happened, after China targeted some of the biggest US exporters in response to American tariffs.

The new penalties also took aim at American farmers, driving down soybean and cotton prices.

Meanwhile, investors are pricing in a Federal Reserve interest-rate cut this year as a near certainty. Elsewhere, oil stabilised around $61 a barrel after climbing earlier on concerns about rising tensions in the Persian Gulf.