RMB Markets Daily: Surveying the Damage

Covid-19 update

Economics and Markets

  • Civil unrest is reportedly settling in Gauteng, though certain residential areas remain on high alert.
  • Mass clean-up campaigns of the tsunami-like debris are underway.
  • Certain parts of KwaZulu Natal remain vulnerable to unrest.
  • Both Fitch and Moody’s acknowledge the risks that prolonged disruptions pose to the already fragile recovery.
  • All measures of risk priced into financial markets have lessened as the week progressed.
  • Buying and selling pressures are finely balanced, with yields little changed at the open.
  • Spot rand is seemingly directionless after being thrown about earlier this week.
  • USD/ZAR opens at 14.48; EUR/ZAR at 17.23; GBP/ZAR at 20.15; CNY/ZAR at 2.25; and XBT/USD (Bitcoin) 31,758.91

We’re nearing the end of one of the most tumultuous weeks in SA’s recent history. Civil unrest is reportedly settling in Gauteng, though certain residential areas remain on high alert as stragglers look to raid businesses still in operation. Community groups and private security continue to patrol suburbs, adding to the police efforts to quell disturbances. Mass clean-up campaigns of the tsunami-like debris are underway, with citizens being called upon to assist.

Certain parts of KwaZulu Natal remain vulnerable to unrest as reports of looting and buildings being set alight are still filtering through. Supply chains have been severely compromised in KZN, forcing residents to travel vast distances in search of essential supplies. The vaccination roll-out in the province has been suspended until such time as the distribution and safety of the medication can be assured. Major pharmaceutical distributors have also warned of their inability to deliver to compromised areas unless accompanied by police escort. This is likely to remain the status quo until the protests have fully quelled, increasing the reliance on neighbouring provinces for aid.

We’d wondered when the international ratings agencies would weigh in on the situation. Both Fitch and Moody’s acknowledge the risks that prolonged disruptions pose to the already fragile recovery and in restoring the health of public finances. Like most, the agencies have stayed any changes to their forecasts and ratings outlook until such time as the full economic and fiscal cost can be assessed. Most estimates of growth, including our own, allow for downside risks on account of structural constraints. Arguably, this could worsen, but without the necessary high-frequency data and confidence surveys, the margin for error is large.
All measures of risk priced into financial markets have lessened as the week progressed. SA’s 5-year CDS has stabilised slightly below the 200 handle, having kicked up 8.9bp week-on-week. With the SARB’s July MPC coming into focus and the FOMC meeting taking place shortly thereafter, market participants are weighing local risks against a precarious global backdrop.

As set out in the local rates section, buying and selling pressures are finely balanced, with yields little changed at the open. Seeing as it is Friday, most of the morning will be dedicated to the weekly linker and T-bill auctions. With respect to ILBs, real yields continue to offer fundamental value, however, the market has been trading with a slight bearish undertone. The auction is expected to be well supported and to clear at, or slightly weaker than, current mark-to-market levels. As for T-bills, in keeping with recent auction trends, the 9- and-12-month area of the curve could come under pressure, shifting a bp or two higher.

We cannot speak of financial markets without reference to the spot rand which is seemingly directionless after being thrown about earlier this week. As the US dollar steadies, EMs will be left to their own devices in determining ranges for their respective currencies. Data risks are prevalent towards the end of the day as the US releases retail sales and sentiment figures, though much of the debate centres on global monetary policy as the Fed, ECB and BoE contemplate different forms of tapering and the potential timing of withdrawal. With this in mind, the rand is likely to be bound around the 14.55 level against the greenback but remains exposed to flare-ups over the weekend.

We hope for the best but prepare for the worst. If anything, this week has once again shown how resilient we really are.

Nema Ramkhelawan-Bhana

Local Market

Bonds managed to retrace some of their recent losses on Thursday as a certain sense of calm came over South Africa. With additional troops being deployed to keep the rioting and violence in check, we saw SAGBs close the day 3-5bp lower while the curve came under slight steepening pressure. Flows seen from locals were relatively mixed. We saw some local real money profit-taking on the move lower, with accounts selling bonds into the strength, but local clients were net buyers of approximately R1bn, while offshore clients were net sellers of R962m.

Although there still appear to be pockets of unrest in KZN, Gauteng seems to have calmed down for now which should be supportive of rates today. Overnight, we’ve seen markets trade with a slight risk-off bias despite Powell reiterating that the US recovery still has some way to go before tapering can take place, although this shouldn’t filter through to SA as aggressively. We expect SAGBs to follow the currency for guidance today and keep an eye on US retail sales and sentiment prints.

National Treasury is set to raise R1.2bn in ILBs spread across the I2029s, I2033s and I2046s. The real yield space has been relatively quiet given the volatility in the nominal space driven by the recent turmoil, but the market has been trading with a bearish undertone. We therefore expect opportunistic bidding in today’s auction, but the auction should be fully allocated with yields clearing at or slightly higher than current MTM levels.

Michelle Wohlberg

News headlines

Bank of Japan  cuts growth forecast, unveils outline of climate scheme
BoJ cut this fiscal year’s growth forecast on Friday but maintained its view the economy was headed for a moderate recovery; a sign monetary policy will be in a holding pattern for some time. BOJ to offer zero-interest, long-term funds under climate scheme.

Fed’s Powell concedes anxiety about higher inflation but resists policy shift
Powell said recent inflation was uncomfortably above the levels the central bank seeks, concluding two days of testimony in which he sounded somewhat less confident about the economic outlook—and the Fed’s policy path—than earlier this year.

Bank of England steps up debate about cutting stimulus as soon as next month
An unexpected surge in U.K. inflation and a record hiring spree are starting to convince some BoE policy makers that the time to step off the stimulus pedal is fast approaching — potentially as soon as next month. Pound jumps after two speakers warn on rising inflation.

Credit rating upgrades hit record pace as US economy rebounds
The brisk pace shows credit rating agencies such as S&P Global, Moody’s and Fitch believe the economic recovery spurred by vaccine rollouts has made corporate debt piles more manageable. It also reflects the abundant liquidity and low borrowing costs available to many companies, in part thanks to monetary stimulus from the Federal Reserve.

U.S. import prices rise solidly in June
U.S. import prices increased solidly in June as bottlenecks in the global supply chain persisted, the latest indication that inflation could remain elevated for a while amid strong domestic demand fuelled by the economy’s reopening and fiscal stimulus.

New York manufacturing expands at record pace, price gauge rises
A gauge of New York state manufacturing in July advanced to a record high, reflecting the strongest orders and shipments in 17 years, while a measure of selling prices advanced to an unprecedented level.

US jobless claims fall to pandemic lows
Applications for unemployment benefits fell to 360,000 last week, from a seasonally adjusted 386,000 a week earlier, as the labor market continues to heal.

Sub-Saharan African countries not yet coming to grips with pandemic
Fitch Solutions Country Risks & Industry Research maintains that the vaccination rollout is still of huge concern in sub-Saharan Africa, considering that few vaccines get administered owing to lack of infrastructure for distribution, particularly into rural regions.

Asian shares slip as investors look past upbeat tech earnings
Asian shares headed lower on Friday as profit-taking in Taiwanese chip giant TSMC, despite record profits, weighed on other tech firms and broader risk sentiment, while a more dovish U.S. rates outlook kept bond yields near multi-month lows.


Source: RMB Markets