Market Wrap

Markets @ Bidvest Bank - 25 January 2016

By Bidvest Bank
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  • The US data card was a mixed affair on Friday, but featured strong headline readings on the major figures of December existing home sales and the January Markit manufacturing PMI. The former saw a sharp rebound on sales from an anomalous slump in November. An uptick on the manufacturing PMI was perhaps more notable for potential impact and relevance to the economic outlook of a troubled sector of the economy. It is early days yet and only one reading, but should the likes of the more-watched ISM PMI mirror this then we could well see a sharp repricing of Fed rate hike risk for this year.

  • The corporate earnings calendar hots up this week with the likes of Apple and Microsoft among 10 other Dow titans due to report including industrial majors Boeing, Caterpillar and DuPont.  The data card meanwhile starts off on a subdued footing with only the Dallas Fed manufacturing index out today and unsurprisingly expected to reflect the continued weakness in the energy sector. Anticipation will be building for the January FOMC in the middle of the week.









  • A slow start to the week in terms of the local card, but the remainder of the sessions feature plenty of BoE speakers following last week’s MPC as well as the preliminary Q4 GDP figures that will dominate focus.

  • The first estimate of UK GDP growth for the final quarter of 2015 is scheduled for release on Thursday, with the economy expected to have expanded at a slightly faster rate than it did in Q3. Bloomberg consensus estimates have the Q4 growth rate pencilled in at 0.5% from 0.4% in Q3, which if matched will equate to 2.2% growth rate for the whole of 2015. This is considerably weaker than the 2.9% GDP growth recorded in 2014.









  • BoJ Gov. Kuroda again talked down easing prospects late last week, but the market’s dovish speculation likely to persist ahead of this week’s MPC given the internal reports of more easing being considered and the dovish ECB outcome. Any softness in data ahead of this will add to the speculation. In this regard, the first piece of important data has disappointed, with Japanese exports falling the most in more than three years in December compared to a year earlier.

  • In terms of Chinese developments, reports are doing the rounds that the PBOC is not too keen to formally cut reserve ratios and rates again over fear of causing more capital outflow and negative speculation against the yuan. Pre-New Year liquidity preparations are in full swing, however, to keep funding costs low and stable for early next month.




  • A major worry for EZ growth is the heavy exposure to China via the trade account, which is much greater than DM peers. So far though we have yet to see a material deterioration. Bloomberg data reveals that while goods exports to China from Germany are contracting, imports from China are also under pressure when looking at a smoothed year/year three-month average measure. The net effect is only a small drag and not dissimilar to the 2014 experience.

  • The IFO business climate reading will hold focus today to show if worries are deepening at the start of the year with the headline index still holding at trend highs. Note that the coming week will see a number of tier-one data releases, with many countries releasing estimates of GDP and inflation. The euro-area flash CPI estimate will be published towards week’s end.

    Developments worth noting:


  • Not much in the way of good news in the SA press over the weekend.  There were reports about how SA’s Davos team was left out in the cold having to deal with the negative sentiment in the aftermath of Nenegate.  There were reports about Barclays wanting to exit as well as Chevron looking to sell their stake in a local refinery.  There appears to be a battle brewing at SARS between Fin Min Gordhan and SARS commissioner Moyane around a leaked KPMG report detailing the existence of a rogue unit within SARS.  It is believed that Sanral will be needing a bailout making it the latest parastatal that requires this and finally, the effects of the drought are becoming a little clearer with the country’s grape output affected by drought, fires and abnormally hot conditions.

  • Some of these issues are self-inflicted, some clearly not and other a function of the market and economic backdrop and local regulatory headwinds.  On the matters that are outside of SA’s control, the weak economic backdrop is something that cannot be ignored.  Japan’s export data this morning fell sharply by the most in three years by 8.0% y/y.  China’s slowdown and the downgrading of overall global growth by the likes of the IMF and the World Bank recently speak to a weak backdrop that is unlikely to improve any time soon.  There are no indications that the cycle is about to turn for the better.  On the contrary, there are signs that the global environment could very well deteriorate in the quarters ahead all of which would have a major influence on commodity prices and in turn commodity currencies.

  • For SA, this raises questions about its attractiveness as an emerging market that is further characterised by its strong alignment with the commodity markets.  It is a perfect storm for SA where the global backdrop conspires with local mismanagement challenges to create an incredibly difficult economic climate which will likely marginalise many in the country and raise serious questions about future prospects. 

  • That said, SA is expected to tip into recession in the next two quarters and that typically helps to restore balance to the trade and current accounts through reduced use of credit and weaker consumption.  The government is planning an austerity budget which could see infrastructural spending pushed out to further alleviate pressure on imports.  Local funds invested abroad have breached their reg 28 mandates and will at some point need to repatriate their holdings and lastly, the adjustment that has materialised thus far has helped to restore some of the attraction of SA assets. 

Data/Events for the week:

  • It is a busy week both externally and in terms of the local data card. Domestically, the SARB is expected to maintain a hawkish policy bias, while PPI data is expected to confirm the rising inflationary trend. With the downbeat growth outlook being highlighted as a concern for the ratings agencies, the government budget figures for December will be scrutinised for clues of belt tightening by the Treasury. In addition, we have the money supply and trade figures for December.

Globally, anticipation will be building around communication out of the US Fed’s January policy meeting which concludes on Wednesday as well as the Bank of Japan’s MPC on Friday.

Trade Weighted ZAR:

  • The rand strengthened 2.3% on a trade-weighted basis in the week-ended January 22, marking the first weekly advance since December 21 and trimming year-to-date losses to 4.9%.  Gains on the week were broad-based across the majors. Specifically, the ZAR advanced just over 2% vs. the USD and GBP, 3.2% vs. the EUR and 3.6% vs. the JPY. Global risk appetite picked up, particularly towards the week’s end, with a spike in oil prices and the prospect of additional stimulus from the ECB and the BoJ spurring risk appetite.

  • While the ZAR has staged a recovery, the currency remains fragile and highly sensitive to shifts in global liquidity flows. A big impactor for the local unit this week will be the SARB’s decision on interest rates, while various other major global central banks, will also deliver policy decisions this week. In terms of the SARB, most in the market believe that a 25bp hike would be too little and would risk fostering a strong depreciative response from the ZAR.  At some point, the weakness and volatility of the currency can be more detrimental to growth than a few bold interest rate increases.  The fact that that stability will be in part achieved through the retrenchment of consumption may be negative at first, but it will also remind households and businesses of the need to run their affairs prudently and not to leverage themselves too aggressively.

  • We have moved long past the point where low interest rates could be deemed appropriate.  The risk assessment within the EM environment is the most elevated since the financial crisis.  There is talk of substantial outflows and of overvalued stock markets.  EMs are being repriced to better reflect this reality and the Fed’s decision to start tightening monetary policy to some degree acts as a catalyst for this. In such an environment, rand volatility is likely to remain the order of the day.


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