Market Wrap

Markets @ Bidvest Bank - 01 February 2016

By Bidvest Bank
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  • GDP for 2015 capped off the year with just 1.8% annual growth, the lowest since 2011 and missing Fed expectations for more than 2.0%. Q4 q/q annualized was just 0.7%, missing the Atlanta Fed’s 1.0% estimate. The softness of this outcome comes as no surprise given the offshore and energy sector headwinds. Aggregate growth continues being propped up mainly by consumption, but a slowdown in real final sales bodes ill. On the flipside, for the first time in many years, government is not acting as growth drag and with the fiscal deficit expected to continue widening going forward this should help to counteract softness in other sectors.

  • The US card is dominated by the usual complimentary data slew to the GDP data, including personal income and spending figures for a hard data look at wage and consumption dynamics. As per other indicators the market is expected subdued results so it is likely the ostensibly forward-looking ISM manu PMI will hold the most weight in tandem to global PMIs. Lack of stabilization will compound with the fresh dovishness among G4 central banks to keep the market worried about growth prospects.









  • PMI releases at home and abroad kick off the data card this week. Services PMI holds more relevance locally, but the market also has to contend with the February BoE MPC. Given the featuring of the latest inflation report and comments from Gov. Carney, it will hold more prominence than usual.

  • Ahead of tomorrow’s services PMI, focus today will be on mfg. activity, which captures activity in a small sector of the economy. It is particularly sensitive to the external environment and since it holds a strong correlation with that of the more important services sector, focus on the underlying dynamics will be important.









  • Despite the Japanese manufacturing PMI number still pointing to a solid improvement in operating conditions in January, the drop in new orders remains reflective of soft local demand conditions, while the drop in input prices will be of concern for policymakers. With the dust settling on the BoJ’s dovish surprise, the market is still assessing the convoluted structure of negative rate on excess deposits. The BoJ policy bias is clearly more dovish now, with risk of further action heightened.

  • Chinese PMI figures as the last major economic data releases ahead of the New Year week has come in on the soft side. Market sentiment towards Chinese growth remains extremely pessimistic, but local easing measures so far should be promoting some stablisation at least, albeit yet to be reflected in the latest economic data.




  • Softness is starting to show through more tangibly in the latest EZ economic data. Exposure to China for the euro-area’s exports remains much higher than DM peers. The Chinese PMI data has disappointed and so sets the stage for the EZ data releases.

  • In terms of the regional data, the final aggregate reading for January and first reports for Spain and Italy will be released. Historically, revisions for the euro-area index tend to be small, but investors will be looking at some underlying dynamics such as the divergent performance between core-economies and economies such as Greece, which saw it’s PMI rise above the 50 breakeven level for the first time in more than a year in December.



    Developments worth noting:


  • It was a strong finish to the month of January, with several factors playing a role and which are likely to remain influential for a while to come.  These are the kind of factors that will lend a healthy dose of support to the ZAR and which will assist in stabilising economic conditions.  Arguably the most important development is the report on the front page of the Business Day which details how a group of some 60 CEOs had a meeting with the Finance Minister to discuss ways in which the private sector could assist the country avoid a slide into junk status.  This sort of interaction between government and the private sector is extremely encouraging in that it goes some way to bridging the ideological divide between the two and offers the government an olive branch for future cooperation.

  • A number of topics were broached such as the use of private capital in a public-private partnership as well as the deployment of private sector skills in the upper echelons of the SOEs in order to assist with good governance and the more efficient running of these strategic companies.  From the article, it is clear that this was a constructive meeting and one can only hope that the authorities use the opportunity to try and stabilise the country’s fiscal position.  If there is one regret, it is that it has taken so long for this to happen, but at the risk of over-hyping the development, it may be a watershed moment in that the private sector is becoming more activist in their approach.

  • Economically speaking, South Africa’s trade surplus widened to R8.2bn in December from the revised lower R0.7bn (prior R1.8bn) surplus in November, to mark the largest surplus in four years. For 2015 as a whole, the R49.2bn trade deficit marks a substantial narrowing compared to a R95.1bn shortfall in 2014. On a y/y basis export growth softened to 1.7% y/y from 11.1% y/y in November. Imports meanwhile, contracted 0.1% y/y after expanding 3.8% y/y in the prior month. Lower imported energy costs likely assisted in containing the import bill into the close of the year, but in terms of exports, we have yet to see the sharp ZAR sell-off in December provide a meaningful boost. Looking ahead, exports may come under pressure from the softer global growth outlook weighing on demand for SA goods. The weak rand appears to be crimping import demand and should the currency continue to weaken in coming months could do so even further.  Whilst oil prices remain subdued, weaker imports will help the trade and current accounts stabilise. 

Data/Events for the week:

  • Today, local vehicle sales and Barclays PMI data will provide some insight into the growth dynamics of the SA economy, which are likely to remain under pressure. The economy-wide Standard Bank PMI will also draw attention mid-week while SACCI Business Confidence and reserves data cap the week’s data card. Externally, various PMI releases will give a further indication of the strength of global growth post soft Chinese releases earlier this morning. Thursday brings with the BoE rate decision - given the featuring of the latest inflation report and comments from Gov. Carney, it will hold more prominence than usual. In the US, payrolls data for January will be released on Friday following a knock-out performance in the December figure. Overall, labour market tightening still appears in swing despite all the headwinds the economy has endured and disappointing aggregate growth.

Trade Weighted ZAR:

  • Weakness in the JPY post the surprise move by the BoJ to implement further stimulus by introducing negative deposit rates, was the primary impetus behind a 4.0% advance in the trade-weighted rand last week. Specifically, the rand advanced 5.6% vs. the Japanese currency in the week-ended January 29, with the decision by the major CB reigniting the carry trade, which is likely to remain in place as long as levels of risk aversion remain more subdued.

  • Consequently, the rand also appreciated by over 3% on the week against the likes of the EUR, GBP, CNY and USD, to trim its trade-weighted losses for the month to 1.0%. Also underpinning the strong ZAR performance was the SARB’s decision to hike interest rates by 50bpts to bring the benchmark repo rate to 6.75%, with some additional support likely also stemming from a less hawkish FOMC statement and a recovery in global stock markets. Clearly the SARB has recognised the value in steadying the ZAR to allow for a more stable trading environment for corporates. Additionally, this is one more incremental step towards crimping consumption expenditure and assisting the rebalancing of the trade and current accounts. At the point where the rebalancing has completed, the outlook for the economy will stabilise and could even improve when the ZAR starts to stage a recovery, but more hikes are required to begin the reversal process.

  • In the near term, focus will be on the BoE rate decision this week. It is notable that the markets have moved away from any expectations of UK policy tightening. Weak growth headwinds are starting to weigh on DM central bank decision making.  This will undoubtedly offer the local unit some support, at least in the short term.  We remain far from convinced that this will be the end to any further ZAR weakness, but it does represent a meaningful removal of depreciative forces on the currency.

Bidvest Bank Limited, 19 Ameshoff Street, Braamfontein, Johannesburg, 2001 (“Bidvest Bank”). The information furnished in this report (“this report”), which information may include opinions, estimates, indicative rates, terms, price quotations, and projections, reflects the current view of the author(s) and prevailing market conditions, which view and conditions are subject to change without notice. The information herein has been obtained from various sources, the accuracy and completeness of which Bidvest Bank does not guarantee. This report does not constitute advice or any recommendation, and independent tax, accounting, legal and financial advice should be sought, should any party seek to place any reliance on the information contained herein. This report has been prepared for general information purposes only and may not be construed as an offer to buy or sell, or a solicitation of an offer to buy or sell, any financial instruments or to participate in any particular trading strategy in any jurisdiction. Any additional information relative to any financial instruments and financial products reviewed in this report is available upon request. All rights are reserved. Any unauthorised use or disclosure of this report is prohibited