Market Wrap

Markets @ Bidvest Bank - 07 March 2016

By Bidvest Bank
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  • Labour market indicators continue showing no signs of distress in the US with the latest payrolls figure in fact blowing out expectations with a 242k print and topside revisions to boot. Private payrolls growth likewise exceed 200k in spite of one of the deepest contractions in manufacturing sector employment in the post-crisis era. This divergence just goes to show how headwinds in the sector do not pose a risk to the economy at large. One area of concern in the report was a sharp slowdown on earnings growth with the annual figure falling to 2.2% from 2.5%. This however looks to be driven by a calendar effect and is likely to be swiftly corrected in forthcoming releases. The Fed will nevertheless likely stick with indications from the top three policymakers that rate hikes will be put on hold this month, but incoming data continues putting the market on-notice for its dovish appraisal of Fed hike risks this year.

  • The data card is much lighter this week with no top tier releases on tap. With the FOMC next week, the Fed will be going into blackout mode.  








  • It will be a slow start to the week locally with some BoE speakers to contend with. More focus will be on Gov. Carney’s remarks to parliament tomorrow on the subject of Brexit issues. In October, the BOE published a report on the economic implications of membership that did not consider the impact of a British exit. The latest comments will likely serve to keep the market’s wariness over the matter prominent and affirm lower for longer rate prospects from the BoE.

  • Industrial production data for the month of January will hold some focus in the middle of the week. The extraction industries tend to add some volatility to the headline print, so the manufacturing data will be looked at in isolation.








  • Latest comments from Gov. Kuroda are that he is not considering a further lower of rates at this time, but will use all dimensions of the QQENR as necessary. The game of hot policy potato between fiscal and monetary policymakers is still in full swing, keeping market uncertain firmly in place. The latest CFTC figures meanwhile, reveal a huge JPY net long position entrenched, which is the highest since January 2012, but underscores the risk of a squeeze unfolding. The next BoJ MPC is on March 15.

  • In China, the NPC meeting continues to dominate focus, with the 6.5-7% 5-year growth target lower than last year’s 6.9% and underscoring official acceptance of lower growth dynamics. Balancing growth needs with structural/balance sheet reforms remains the big issue, however.




  • Ahead of the ECB decision this week where the CB is expected to add to its stimulus efforts, there is plenty of data out there to strengthen the argument for further officials to become more active in assisting the economy and to fight against deflation.

  • Germany’s economy has not produced particularly good data recently and is reflecting the distinct possibility that the EZ’s economic powerhouse will experience very subdued economic activity. Italian Q4 GDP data was confirmed at just 0.1% confirming an economy that is struggling to regain any momentum and whose debt levels are steadily rising as the budget deficit remains wide at some 2.6% of GDP.




    Developments worth noting:


  • Friday’s strong US data and on-going rally in the commodities and equities complexes have kept Treasuries under pressure, while a rebound in inflation proxies like break-evens has prompted the market to reappraise Fed hike risks for this year. While the Fed will likely refrain from hiking rates this month, incoming data continues to challenge any dovish appraisal of Fed rate hike risks.

  • The ECB kicks off a busy two weeks for major central bank policy setting this week, with its March 10 policy meeting followed up by the BoJ on March 15, the US Fed on March 16 and BoE on March 17. The overall bias amongst these Bank’s remains overwhelmingly dovish, with the Fed still the only G4 central bank with a more hawkish bent given the divergent performance between the US economy and its G4 peers. The ECB’s policy meeting will be accompanied with it latest economic projections, with downward revisions expected to both inflation and growth. While Eonia forwards are pricing in a 10bp cut to deposit rates, the ECB in particular is sensitive to the turnaround in commodities and by extension inflation expectations, so we might see the latest bounce in prices placing a floor under dovish policy expectations. The prospect of under-delivery of easing perhaps helps to explain the EUR’s surprising resilience ahead of this week’s policy meeting.

  • Locally this week’s data card is exceptionally full and a number of key releases will be monitored for guidance on a) momentum in the local productive sector and overall economy into the start of the year and b) whether the economy has made any progress toward rebalancing our large external financing requirements. The former will be gauged via the latest releases of the mining and manufacturing production growth numbers, which are expected to continue to demonstrate how unfriendly growth policies and production constraints (high prices, power constraints etc.) are dampening activity. Externalities in the form of softer commodity prices and weak aggregate demand are seen compounding pressure on the productive sector into the new year.

  • The Q4 current account data will garner some focus despite the dated nature of the release. Consensus is geared toward a mild widening in the C/A shortfall to 4.2% of GDP to suggest the country still has notable scope to make inroads in terms of rebalancing the economy. However, the ZAR blowout in December could change this, as import consumption is forced to be retrenched while the weak currency should also aid in propping up the value of South Africa’s exports.

Data/Events for the week:

  • As mentioned above, the local data card is chock full this week, with the C/A data drawing particular focus. Externally, the data card is much lighter this week with no top tier releases on tap. The ECB however kicks off a busy two weeks for Central Bank policy setting (ECB March 10, BoJ March 15, US Fed March 16 and BoE March 17). Global central banks, with the exception of the Fed, are becoming more accommodative to try and stimulate their economies and could spark another round of foreigners searching for yield. Add to that the rise in domestic interest rates and the fact that the trade and C/A deficits will likely narrow further in the months ahead and that global levels of risk aversion are subsiding, and the stars are aligning for a more supportive environment for ZAR.

Trade Weighted ZAR:

  • The trade-weighted rand strengthened by a robust 4.2% in the week through March 4, helping the local unit incur a modest 0.3% advance on a year-to-date basis. Gains were most pronounced against the dollar, where the local unit appreciated 5.3%, followed by the JPY and CNY at 5.1% and 4.8% respectively.

  • Rallies in the commodity and equity spaces kept risk revival in full swing, and not even the stronger than expected non-farm payrolls data released out of the US on Friday could significantly change the status quo. More broadly, there has been a significant adjustment for the reality that the Fed will not be able to hike rates in the manner that they had initially intended, and it appears that this is being brought to bear.

  • That said, it is worth highlighting that the rand’s particularly strong performance vs. the dollar has gone a long way in bolstering the currency’s trade-weighted performance and therefore any renewed hawkish shift in US policy expectations could dampen the rand’s resilient performance of late.

  • In the interim, EM FX and commodity prices are generally enjoying greater support and it promises to be an improved start to the week where the local unit could very well consolidate its recent gains and perhaps even record more should the local current account data reveal good reason to turn more optimistic on the ZAR. The value proposition to foreigners is gradually reasserting itself and will likely continue to do so in an environment where the bulk of global central banks are becoming more accommodative and as ZAR fundamentals gradually improve.

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