Market Wrap

Markets @ Bidvest Bank - 22 February 2016

By Bidvest Bank
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  • The US data card was capped off last week with the latest consumer inflation figures for Jan. A big jump on the headline annual reading transpired, from 0.7% to a new 1-year high of 1.4%, driven by more favourable base effects coming into play. Core CPI had already shown the way higher in this respect and continued printing hotter readings up to new 2012 highs at 2.2%. A more recent slump in energy prices coupled with very subdued market and consumer inflation expectations are however likely to keep Fed policymakers wary for the outlook, but current dynamics nevertheless affirm that the FOMC will remain comfortable with its gradual hawkish policy bias.

  • The Q4 corporate earnings period is wrapping up with a slew of retailers due to report this week. FactSet reports that earnings are on-track to post a 3.6% decline compared to the previous year, while excluding energy growth would only be an anaemic 2.7%. The impact of offshore headwinds remains prominent with companies that have more than 50% of sales overseas expected to post an 11.2% earnings decline compared to just 3.6% for their more domestically-orientated peers.








  • Bloomberg - London Mayor Boris Johnson, one of the U.K.’s most popular politicians and prominent Conservatives, said he’ll campaign for Britain to leave the European Union in June’s referendum, putting himself in direct opposition to his party leader, Prime Minister David Cameron.

  • The bottom appears to be falling out from under Cable at the start of the week given indications many prominent Conservative members will be campaigning for a Brexit in the June referendum. These moves affirm the structural strength selling bias for GBP-USD with an eye firmly on the 1.4000 handle over the medium-term.

  • The second reading of Q4 GDP growth will be key in focus this week.









  • The Japanese card opens the week with the latest manufacturing PMI for February showing on-going headwinds to the sector as a soft global trade environment weighs. It is unclear how policy will respond to continued softness, with the BoJ looking out of ammunition while PM Abe seems to be hinging on coordinated action from G20 meeting later this week.

  • Bloomberg is reporting that China’s private companies are doing a better job than state-owned peers cutting debt, new research shows, adding to calls for President Xi Jinping to overhaul the country’s industrial sector ahead of annual legislative meetings in Beijing.




  • The ECB would be looking to protect the banks from a more significant fallout if it decides to ease monetary policy further in March.  Whilst the natural assumption is to think of the banks as being under capitalised and needing support, the ECB in this instance through Vice President Constancio was alluding to the detrimental effect that low or negative price pressures would exert on the real value of debt owed to the banks.  Constancio reiterated that the main aim would be to try and force the short end of the money market curve lower, presumably to affect the term structure of interest rates in the EZ.

  • EU lenders have reportedly been working on a plan to allow Greece some gradual debt relief which at first would likely come in the form of lower interest rates should certain reforms through to 2022 be adopted. At a later stage debt repayments linked to GDP could be considered.

    Developments worth noting:


  • It is budget week in South Africa and the outcome of the budget will have significant implications for the ZAR and SA markets in general.  It can be described as mission “stop-the-rot” or in more market friendly speak, mission “prevent another downgrade”.  It is within SA’s powers to do so, if some tough decisions are taken. 

  • A rule of thumb is that the budget deficit to GDP ratio should ideally dip below the level of real GDP growth so that a country can ensure that it lives within its abilities to service debt and where debt levels do not grow to leave the burden of financing that debt on a rising trend. Should the budget contain a credible strategy to reduce the budget deficit over time where the growth projections used are conservative and achievable, then SA will have bought more time to implement the requisite reforms.

  • Given how the budget deficit is a key pillar in determining currency fragility due to the implications it has for spending on infrastructure that ultimately impacts the imported component of the trade account, as well as the implications it holds for the country’s risk assessment through the credit ratings, this week’s developments hold significant implications for the ZAR through the months and quarters ahead. Stabilisation of the fiscus would alleviate the risk related pressures on the currency massively and help the country differentiate itself vs. fellow EM economies.

  • What makes this a tough job for Pravin Gordhan and his team is that it will take place within an environment of almost non-existent growth implying that SA will be deploying an austerity budget of its own that will likely combine a rise in the tax burden on the private sector together with a reduction in expenditure in real terms by the state. Relying too much on the private sector would only ensure that the growth engine of the SA economy is further impaired. What might be seen as a massive positive in the years that follow would be talk of partial privatisations or listings on the JSE that would assist the government in raising capital to spend on infrastructural causes and/or to assist in paying down national debt levels.

Data/Events for the week:

  • The week ahead will be particular busy on both the local and international front as far as economic data releases are concerned. From an economic perspective, things get off to a rather slow start with focus falling squarely on various preliminary PMI releases for February. The Japanese mfg. PMI already released earlier today reflected the on-going headwinds to the sector as the soft global trade environment weighs, a feature expected across regions.

  • Arguably amongst the most important releases will be the second reading of US Q4 GDP growth as well as consumer income and spending scheduled for release on Friday. Expect Fed rate hike risks to be scaled back on the back of a soft outcome, particularly if consumer spending data for January also shows a loss of resilience into the New Year. In terms of global policy setting, a number of Fed speakers are lined-up this week. The market will be sizing up the potential changes to the dot plot come the March FOMC. International focus towards week’s end will turn to the G20 finance minister meeting on Friday and Saturday where topics of discussion will centre on global growth, the Fed, oil prices and China.

  • Locally, this Wednesday’s Budget will arguably be the most important in SA’s democracy. It will be carefully scrutinised for indications on whether SA will be downgraded again as early as June, but it is important to note that SA is currently facing the consequences of years of fiscal mismanagement and it is unrealistic to expect a single budget presentation to reverse what has already been done without sacrifices being made both by the public and private sectors.

Trade Weighted ZAR:

  • The trade-weighted rand strengthened for a sixth successive week in the week-ended February 19, by 3.3%, culminating in a flat year-to-date performance.

  • On the week, gains were most pronounced vs. the EUR, with an over 4% advance recorded. European currencies themselves (EUR, GBP, CHF etc.) broadly underperformed amid better risk se*ntiment.

  • The safe-haven JPY also reversed some of its previous gains, seeing the rand strengthen 2.6% against the Japanese currency whilst also gaining 3.2% vs. the dollar. The USD itself continues to put in a mixed showing against the majors whilst higher beta and commodity FX benefit further as risk appetite picks up.  We anticipate the dollar index settling in for a period of consolidation and pivoting until a clearer directional catalyst manifests. This will likely come from oil price dynamics and US economic data performance in the short-term, while the outcomes of the March ECB MPC and US FOMC are the next crucial event risks.

  • The ZAR as always will remain highly susceptible to shifts in global liquidity flows, while an austerity budget that helps to curtail consumption and detracts from the imported component of the trade and current accounts will also go some way to bolstering the currency’s prospects.



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