Market Wrap
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Markets @ Bidvest Bank - 04 April 2016

By Bidvest Bank
04-04-2016
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Fundamentals:

US:

  • The latest payrolls figures for Mar were on the strong side despite some mixed dynamics in the internals of the report. Headline payrolls growth remained stellar in excess of 200k with topside revisions to priors to boot. The unemployment rate paradoxically ticked up for the first time in nearly a year despite this, however this increase was due to the positive effect of labour force participation expanding. On the crucial wage front, weekly earnings were stronger despite calendar effects however hours worked held steady, taking the shine off the increase. Overall, while not shooting the lights out in terms of consensus expectations, the labor market remained strong and tighter in the first quarter despite the growth slowdown.

  • The other major release on the session was the ISM manufacturing PMI and, as rebounding regional surveys had indicated, the headline figure rose strongly back into expansion territory for the first time since Sep. With the dollar back on the retreat and oil prices having stabilized, participants will be anticipating that the worst is over for the sector. The main downside within the internals was a soft employment sub-component, perhaps suggestive that confidence has not fully been restored.

     

     

     

     

     

     

UK:

  • Brexit concerns remain prominent, with the latest polls over the weekend still showing the outcome as a coin flip given the large contingent of undecideds. The current uncertainty will help to underpin the already-dovish macro considerations in providing a structural hindrance for sterling.

  • A survey of chief financial officers published by Deloitte has indicated that 75% of the CFOs from FTSE 350 and other large private companies backed a continuation of the UK’s EU membership in Q1 2016, up from 62% recorded in Q4 2015.  The survey also highlighted that 83% of CFOs thought the level of uncertainty facing their business was above normal, high or very high, the highest level in over three years. Only 26% of firms have made contingency plans for a possible “Brexit.”

 

 

 

 

 

 

Asia:

  • A slow start to the week in terms of local data, but first focal point will be tomorrow with the latest wage data. Anaemic performance should underscore that the BoJ can’t push out an easing response any further, especially as Spring wage negotiations have done little to affirm that inflation pressure will be coming from the demand-side any time soon.

  • Caixin reporting on a trial debt-to-equity swap plan to help clean up the balance sheets of China’s bloated state banks. Initial talk is that a CNY 1 trillion conversion would be allowed over 3 years. This represents just a fraction of the total liabilities of the system, however, and is unlikely to allay credit risk concerns.

     

     

EU:

  • The Eurozone data card opens with latest Sentix investor confidence. These surveys usually track equity markets with a lag so will be unsurprising to see them staying relatively buoyant for the time being. More interest will be on comments from influential ECB MPC member and chief economist Praet who is scheduled to speak at 08:30 GMT.

  • Greek default risks are hogging the headlines once again at the start of the new week. This on the back of a leaked report from Wikileaks in which IMF officials discussed the possibility of threatening to leave the bailout to force European lenders (Germany) to offer more debt relief. EU/IMF lenders are due to resume talks on Greece's fiscal and reform progress today, as part of a bailout review to unlock further loans and pave the way for negotiations on long-desired debt restructuring. Greece has no major redemptions due until July this year.

     

    Developments worth noting:

  • It has been a tumultuous weekend starting with the “apology” on Friday evening from President Zuma for the frustrations caused in the way that the Nkandla saga was handled.  The ANC and government have played down the significance of the Constitutional court ruling and will rely on their majority in parliament to continue in their roles and positions.  For many investors this will have been a worrying development and entrenches the view that the damage being done by the executive of government and the ANC will continue for a while longer.  It now comes down to the voters in the regional elections to express their dissatisfaction at the manner in which the country has been run.  For what it’s worth, parliament will debate a call for President Zuma’s impeachment on Tuesday, but with the ANC having provisionally accepted President Zuma’s apology, the likelihood of ANC MPs breaking ranks with the official party line is minimal and the central expectation is that nothing much will come from this motion other than more mid slinging.

  • Interestingly, there was no major response from the USD-ZAR in US trade on Friday or in Asian trade this morning.  With the trade weighted USD having consolidated its weaker position on Friday, there was no clear cut catalyst to punish the ZAR with the market seemingly positioned for Zuma to remain in power.  It would suggest that the balance of power in so far as ZAR direction is concerned has shifted to offshore developments and the reaction of the USD.  However, given the worrying developments of the weekend, one cannot rule out the prospect of a stronger USD bid this morning to take the USD-ZAR back towards the 14.8000 mark or higher.

  • A quick assessment of the speculative positions on the USD as produced in the weekly CFTC data show that speculators cut net long positions on the USD.  Reuters reports that this is the second consecutive week in which bullish bets on the USD have been trimmed with net short positions on the EUR cut and bullish positions on the likes of the AUD and JPY built up.  This confirms that sentiment towards the greenback remains dented by the recent comments by Fed speakers that played down the prospects of more aggressive rate hikes.  For the ZAR this will offer some relief given the backdrop of negative domestic sentiment.

Data/Events for the week:

  • On the data front, it will be a relatively quiet start to the week but things will heat up on Tuesday when the latest PMI data is released and parliament resumes, starting with the debate around President Zuma’s impeachment.  There is no question that party politics will now take centre stage ahead of the local elections in the next couple of months and that sensitive political issues will be brought up repeatedly to try and score political points.  For the ZAR this will be a tricky time that might only compound the negative growth environment already in play.

  • Internationally, there will be some fairly important data that is released out of the US and that could have a bearing on the USD.  The week starts with the release of factory orders and durable goods and is followed closely with other real economy data sets such as the service sector PMI, jobless claims and wholesale sales.  However, arguably the most important development of all will be the release of the latest Fed minutes of the 15-16 March meeting which will offer further insight and guidance on the Fed’s thinking with regards to monetary policy.  There has been a clear shift in expectations towards a flatter rate hike trajectory, especially from Fed Chair Yellen and investors will be on the lookout for whether there is further proof that the trajectory will be a flatter one than was originally priced in.


Trade Weighted ZAR:

  • On a trade weighted basis, it is important to note the reversal of fortunes that has unfolded with regards to the trade weighted performance of the ZAR.  It has reversed a long way and if one were to add some technical analysis to any study, it would show that the trade weighted ZAR has now punched through a key trend line that has held since mid-2015.  It signals the potential for a larger trade weighted ZAR reversal in the months of at least another 10-15%.

  • Analysis of the breakdown of the ZAR’s performance against the majors shows that the local unit is gaining steadily against most of the majors.  It speaks to a combination of themes.  The first is that global DM central banks are slowly turning more accommodative and secondly, that the underlying fundamentals of the SA economy are turning steadily more supportive of a ZAR recovery.

     



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