Market Wrap

Markets @ Bidvest Bank - 21 July 2014

By Bidvest Bank
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• It would appear that corporates with healthy balance sheets are now also using the low rate environment to issue debt for M&A activity.  However, too much leverage has its trappings.  Moody’s has confirmed that AbbVie’s cash and stock merge with Shire PLC is considered credit negative and corporates will need to be careful of too much leverage.
• Although still buoyant, last week’s Michigan consumer sentiment indicator saw its headline number dip in early July.  Not too much being read into this just yet, although it may be a sign that the highs are being tested and that consumer confidence may not improve too much further.
• As we head closer to the end of the month, “holdout” investors are convinced that Argentina is determined to default.  Argentina is holding out for a stay of the US court order, but that is looking unlikely.
• Although Russian President Putin may be holding out, the UK, Germany and France have agreed that they should be prepared to chance their stance and ratchet up Sanctions on Russia when they meet on Tuesday.
• Sterling may have retreated off its recent highs but it remains clear that the safe haven bid will keep a floor to just how far the GBP will retreat despite the ultra-long position that needs a clear-out.
• Rightmove’s house price measure retreated on a m/m basis for the first time in 2014 while also softening to a Jan low on a y/y basis, offering some support to suggestions that UK house prices will cool off as the year unfolds.  Although prices retreated, Rightmove still expects house prices to be up 8% for the year.
• With Japanese markets closed for Marine Day at the start of the new week, it is worth having a look at the upcoming June CPI data on Friday, which is expected to have slowed to 3.5% y/y vs. 3.7% y/y in May. With prospects for inflation to remain above 1.0% for the remainder of the year, analysts remain unconvinced that the BoJ will have scope for fresh monetary easing.
• Meanwhile, govt. over the weekend indicated that PM Abe plans to replace more than half of his 18 cabinet members in a planned reshuffle in early September. The proposed restructuring is reportedly a move to satisfy LDP colleagues with aspirations to serve on the Cabinet. Key members, including the Fin Min, Deputy Min and Chief Cabinet Secretary, are however expected to retain their positions. 
• The ECB last week announced a fairly substantial EUR21.5bn worth of repayments of LTRO funds.  This is significantly larger than the EUR3.5bn anticipated and promises to generate a liquidity squeeze as excess reserves are drained from the system.  EONIA rates have already responded by rising by some 1.5bp.
• One of the holding companies of Portugal’s BES, namely Espirito Santo International (ESI) filed for creditor protection on Fri in Luxembourg whilst the Angolan CB indicated that the Angolan unit of BES would require more capital to deal with bad loans.  ESI has indicated it is not able to meet much of its debt obligations which have matured.

Developments worth noting:
• Wall St is proving its resilience, having bounced higher on Friday after falling sharply the prior day and now the major bourses again standing just shy of their prior highs. US Q2 earnings season has thus far topped market expectations for the most part, Reuters reporting that approximately 68% of S&P500 firms to have reported have beat profit estimates, above the 63% long-term average and a similarly positive result to that on revenues. Given an average profit growth estimate of 6.7%, it puts more weighting on this quarter’s results as expectations had been very low through many quarters previously. It gives some justification to still elevated stock prices and though the Wall St rally on the day did not prove to be a dollar positive, it can ultimately be tied in with the theme of gradually rising US interest rate expectations. 60% of S&P500 firms will be reporting in the next two weeks.
• It puts added emphasis on US CPI data tomorrow and other macro indicators to be released in weeks ahead, but also in focus this week will be the Chinese and EZ preliminary PMI data due on Thursday. The outlook for growth in China and the EZ as two of SA’s largest trading partners is relevant to the rand in what remains a still fairly unhealthy outlook when it comes to the long-term trend on the domestic trade account. There have been indications of Chinese money and credit growth starting to lift on the back of stimulus actions and we would expect this to start to have a positive impact on the productive sector data in time, while in the EZ we continue to see a lack of meaningful growth traction as ECB policy loosening fails to revive lending traction.
• Locally we will be seeing the next CPI reading for June on Wednesday, preceded by the SARB leading indicator on Tuesday. CPI is expected to rise marginally further on a y/y basis to leave the door open to another 25bp hike next meeting, which the SARB in some ways alluded to through its discussion on front-loading a 50bp hike or spacing it out over time. However further out than the next one or two meetings, the SARBs strong downward revision of its growth forecasts is gradually leading the market towards the pricing of a particularly shallow hike cycle as rate hikes in the short term are unlikely to be followed by very many additional hikes if any at all in the medium term.
Data/Events for the next week:
• After having recorded a recent peak of 100.3 in January, the SARB’s leading indicator has steadily declined through the end of Q1. The May data will provide an update as to the expected growth trajectory held by the bank as we head further through Q3. CPI to follow on Wednesday will hold particular focus in context of a SARB that is hiking in order to rein in inflation expectations. Topside risks to CPI remain for the June reading despite the constrained internal demand environment, with consensus geared for a 6.7% y/y print.
• Considering data from abroad, US CPI and the BoE minutes will provide insight into the interest rate outlook for two economies which have been subject to some speculation of rates rising from next year. US CPI came in at 2.1% y/y in May, its highest since October 2012. BoE minutes may however play down rate risks as UK house price growth shows signs of topping out in the near term. Beyond this data, Chinese and EZ preliminary PMI data will hold interest as an update to the global growth outlook.

Trade Weighted ZAR:

• The trade-weighted rand on Friday posted its best daily performance in a month, gaining more than 1.0% to take its month-to-date performance back into positive territory. There was no particular reason for a move which saw many other similarly high beta EM currencies performing well, other than what appears to be a rebound in risk demand that can be linked to the rally on Wall St. On a year-to-date basis, the rand is now sitting some 0.8% weaker with global conditions that are favourable to risk taking allowing for the currency’s weak underlying fundamentals to take a backseat.
• Some commentators are citing a positive reaction to the SARB’s recent 25bp rate hike but this was a move that was mostly priced in leading up to the time and is one that we do not believe significantly reduces the rand’s fragility. Real interest rates are still deeply negative to describe a scenario where the SARB has been too late and too passive when it comes to tightening policy in response to higher inflation. As such, the rand in a position of relying heavily on foreign investor sentiment will still be subject to bouts of volatility and underperformance and has shown a tendency to lose more than it gains despite the aforementioned global conditions.
• Other aspects of the rand’s fragility will continue to be put to the test this week. The long-term trend on the trade account remains worrying and given that China and EZ are major trading partners with SA, their preliminary PMI data due later this week will hold relevance to the trade outlook. Furthermore, metalworker unions have submitted a new, lower wage demand to employers and markets will be hoping for an end to the production stoppages soon, as it continues to contribute to uncertainty around the growth and fiscal trajectory.

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