Markets WRAP: Rand holds firm, ends the day at R13.88/$

Rand ends the day's session at R13.88/$

The rand held its ground, ending the day at R13.88/$. The dollar had slid on the back of dovish comments from the Fed. 

It's trade ranged from R13.77/$ to R13.89/$

US stock futures edge lower as dollar declines

US stock futures slipped with European shares on Friday, while Asian equities rose at the end of a week when sentiment was mostly bolstered by a dovish tone from the Federal Reserve and hopes for a breakthrough on trade.

The dollar fell and Treasuries advanced.Contracts on the S&P, Dow and Nasdaq indexes all pointed to a softer open in New York, while the Stoxx Europe 600 Index handed back an earlier gain.

OVERVIEW: Oil rose for a 10th consecutive day in London, heading for its longest run of gains on record, as OPEC cutbacks reined in supply while reassurance from the Federal Reserve buoyed the outlook for demand.

Futures returned to a bull market this week after recovering about 20% from the lows reached in December, as Saudi Arabia gave assurances on Wednesday that the production cuts by OPEC and its partners starting this month will be deep enough to prevent any surplus. Nonetheless, Brent crude remains 28% below the four-year high it hit in October as US shale output continues to surge and China’s economy shows signs of slowing.

“The mood brightens, and the market realises that the world economy and oil demand are not grinding to a halt,” said Norbert Ruecker, head of macro and commodity research at Julius Baer in Zurich. “Moreover, there is confidence that the petro-nations will cut supplies as promised to balance the market.

”Brent for March settlement rose 21 cents to $61.89 a barrel on the ICE Futures Europe Exchange at 11:48 in London. It’s on track for an 8.5% increase this week after gaining 9.3%, the most in two years, the previous week. Ten consecutive daily gains would mark the longest rally since the contract started trading in 1988. The global benchmark crude traded at a premium of $8.67 a barrel to West Texas Intermediate for the same month.

WTI for February delivery advanced 32 cents to $52.91 a barrel on the New York Mercantile Exchange. The US crude has also advanced for a 10th day, its longest run of daily gains since 2010, and has added 10% this week, the most since December 2016.

Trade Talks

Crude’s direction in the coming weeks may be determined by whether the Organisation of Petroleum Exporting Countries, and allies including Russia, implement output cuts they have promised for the first six months of 2019. Also crucial will be the outcome of trade negotiations between the US and China - the world’s two biggest economies. A deal between the nations could boost flagging global growth that underpins oil demand.

Saudi Arabian Energy Minister Khalid Al-Falih said on Wednesday that the cut of 1.2 million barrels a day agreed by the OPEC+ coalition will be sufficient to balance markets, and that the group is prepared for further action if it proves inadequate.

“Sentiment in the oil market has turned around this week,” said Jens Naervig Pedersen, senior analyst at Danske Bank A/S in Copenhagen. The reversal “is on the back of a combination of OPEC+ production cuts taking effect, a stabilisation in risk sentiment in equity markets and a weaker dollar. In addition, the oil market will be monitoring trade talks, which seem to progress slowly.”

Uncertainty Persists

While recent progress seen in US-China talks has lifted investor sentiment, global financial markets are still struggling to decipher what exactly may have been promised in their negotiations this week. China’s Ministry of Commerce said Thursday that the talks between the two sides were “extensive, in-depth and detailed” and laid the foundation for a resolution.

Chinese Vice Premier Liu

He is likely to travel to the US later this month to meet with US Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin. Meanwhile, dovish commentary by the Fed’s chairman Jerome Powell and his deputy Richard Clarida has added to positive investor sentiment. They said that the central bank will be especially cautious about pushing ahead with interest-rate increases after raising them four times last year.

Other oil-market news:

The  Cboe/Nymex Oil Volatility Index slumped 18% through Thursday, set for the biggest weekly loss since the week ended December 7. WTI rose above its 50-day moving average, at $52.67, for the first time since October 17. Brent broke above the same marker on Thursday for the first time since October 23. 

Goldman Sachs is standing firm with its bullish bet on commodities even after being “hoodwinked” by a shift in investor sentiment that pummeled prices late last year. The gasoline market is expected to pivot into a deficit toward the end of next year as refiners focus on distillates production, it said in a note. - Bloomberg

The pound rallied to the highest since November on a report that Brexit could be delayed beyond the March deadline, before paring gains as the government ruled out an extension.

The currency climbed as much as 0.8% after the Evening Standard newspaper cited unidentified cabinet ministers as saying a delay to the March 29 Brexit deadline was looking increasingly likely.

Sterling then slipped back as a spokeswoman for Prime Minister Theresa May said it wasn’t government policy to extend Article 50. The size of the move shows the market is poised to jump on good news, said Credit Agricole SA’s head of Group-of-10 currency strategy Valentin Marinov.

May’s Brexit deal is widely expected to be rejected by Parliament in a vote on Tuesday.

“There remains an overhang of pound shorts,” said Marinov. “The squeeze in the event of more positive developments could be brutal and propel the pound back to levels last seen in the first half of 2018.

”The pound was up 0.4% at $1.2794 by 11:23 in London, after rising to $1.2851, the highest since November 26. The currency is heading for a fourth weekly gain, its best run in nearly a year, after a bruising 2018 saw it lose more than 5% against the dollar on fears of the UK crashing out of the European Union without a deal. - Bloomberg

OVERVIEW: US stock futures held on to gains and European shares followed Asia higher at the end of a week when sentiment was bolstered by a more dovish tone from the Federal Reserve and hopes for a breakthrough on trade.

The dollar slipped and Treasuries climbed. Contracts on the Dow, S&P and Nasdaq indexes were all range-bound, while miners led the Stoxx Europe 600 Index higher.

In Asia, shares rose in Shanghai, Tokyo, Seoul and Hong Kong. The greenback was set for a fourth week of losses after Fed Chairman Jerome Powell underscored the message of patience with further interest-rate hikes, while saying the central bank will keep shrinking its balance sheet.

European debt tracked Treasuries higher. The pound drifted as UK politicians continued to debate Prime Minister Theresa May’s Brexit deal. Equities are set for big gains this week amid signs of progress between the world’s two biggest economies on trade and dovish commentary from the Fed.

Still, worries remain about economic growth and earnings prospects, while there’s also uncertainty as the US partial government shutdown threatens to extend into a fourth week.

Chinese Vice Premier Liu

He is set to visit Washington on January 30 and 31 for further trade talks and China’s yuan, which slumped last year as trade tensions worsened, is heading for its best week since 2005 - back when the country dropped a fixed peg to the dollar.

Elsewhere, oil in New York traded above $53 a barrel after surging this week. Emerging-market currencies and shares extended recent gains.

These are the main moves in markets:

Stocks

Futures on the S&P 500 Index were little changed as of 08:36 London time. The Stoxx Europe 600 Index advanced 0.2%. The MSCI All-Country World Index increased 0.2% with its sixth consecutive advance. The MSCI Emerging Market Index gained 0.3% to the highest in more than five weeks.

Currencies

The Bloomberg Dollar Spot Index sank 0.3% to the lowest in more than 15 weeks. The euro advanced 0.2% to $1.1524. The Japanese yen increased 0.2% to 108.26 per dollar. The British pound was steady at $1.2743. The MSCI Emerging Markets Currency Index gained 0.1%.

Bonds

The yield on 10-year Treasuries declined three basis points to 2.72%, the biggest fall in more than a week. Germany’s 10-year yield declined two basis points to 0.24%. Britain’s 10-year yield dipped two basis point to 1.254%.

Commodities

The Bloomberg Commodity Index increased 0.7%. West Texas Intermediate crude climbed 1% to $53.11 a barrel. Gold gained 0.5% to $1,293.24 an ounce. - Bloomberg

Bianca Botes, Corporate Treasury Manager at Peregrine Treasury Solutions says the first two weeks of January has not yielded much optimism in the forex market.

In a morning note to clients she said, "While Beijing and the US are meeting to discuss the trade dynamic, the tension between the two countries remains a threat to global trade, with many arguing that the little trust that existed between the two giant economies has now been completely eroded.

"Global growth is showing a decline as populist movements, protectionist policies and the apparent turmoil in the west ensues. Locally, the economy has shown a slight uptick in growth, but it remains weak and, combined with higher unemployment, creates a sense of palpable angst felt among the average working class.

"All-in-all this calls for a bumpy year ahead for the rand, but we should note that volatility does not always indicate weakness and often speaks to the sophistication and liquidity of the South African market.

"The first two weeks of the year saw the local unit make a recovery against the greenback, after trading above the R14.30 mark for much of December. The recovery has been driven mainly by a subdued dollar, weighed down by both the trade dynamic as well the dovish stance observed in the Fed in recent weeks, and reaffirmed during the release of the FOMC minutes on Wednesday evening.

"In data released this week, South Africa witnessed an increase in the Absa PMI, from 49.5 to 50.9, indicating a much-needed expansion in the strained manufacturing sector. However manufacturing production remains subdued at 0.7% growth while total vehicle sales contracted by 1.9% during December, indicating that the local consumer is still financially stressed.

"Attention will focus on the SARB next week, and whether or not an interest rate hike for Q1 is on the cards. The US disappointed with the JOLTS job openings dropping to 6.88m from 7.1m, while initial jobless claims took a positive turn declining to 216k.

"The Fed pledged to be flexible and patient in its interest rate hiking cycle in 2019, in order to avoid a recession in the US. However, we are cynical regarding the view that the Fed might even move to decrease rates in the near future.

"The rand is struggling to find any real momentum and has traded flat for the most part of the past three days. The outcome of the trade talks will certainly assist the currency to find a firm direction. For now, the focus remains on politics, with economic events lurking in its shadow."

Botes said in terms of the rand, the US CPI would be the biggest data influencer for today.

"Technicals indicate a range of R13.78 to R13.95 for the day."

The rand is trading firmer this morning, TreasuryONE said in a morning note to clients. By 08:39, the rand was changing hands at R13.85 to the greenback.

"Fed Chairman Powell’s comments on monetary policy flexibility was tempered by confirmation that they would continue to shrink their balance sheet. News that trade talks between the US and China are set to continue towards the end of January was received positively by markets," TreasuryONE said.

"The dollar rebounded from yesterday’s three-month low to be trading at 1.1528 and 1.2765 against the euro and pound respectively. The pound remains under pressure as we await next week's crucial parliamentary Brexit vote.

"The rand is trading firmer this morning but still within its recent trading range. US equities continued to advance with all three indices closing up on the day.

"US Treasury yields also rose and we see the 10-year bond at 2.73% and the 30-year at 3.05%. Gold is steady at $1 293.50 while Oil is holding on to recent gains at $61.60."

Investing in the US has become riskier for Chinese companies due to the trade war and that won’t improve even if a deal is reached, according to a state-run think tank.

The US was listed as the 14th safest destination for investing in a report from the Chinese Academy of Social Sciences, down from 4th a year ago. That drop was because the US scored the lowest of any of the 57 nations in the analysis for "relations with China".

The researchers also considered economic fundamentals, political risk, debt servicing capability and "social flexibility," which includes factors such as labor mobility. The US scored the highest on economic fundamentals. Chinese investment in the US collapsed last year as China pulled back on FDI, economic relations deteriorated and the US increased scrutiny of deals from China.

"Even if China and the US compromise in the trade negotiations and reach a deal, outbound investment towards the US has been battered" and will not rebound even if trade does, said Zhang Ming, the lead researcher of the report and the director of international investment research at CASS.

"There is no space for optimism" on such investment, he told reporters. An "unsettling" factor is that the European Union seems to have adopted some measures taken by the US in reviewing foreign investment, said Pan Yuanyuan, a co-researcher of the report. The EU approved the first bloc-wide rules to screen foreign investments from outside the bloc. - Bloomberg