This day in history

GM Daily: This day in history

Global: US outperforms China on the data front this week

SA: Still awaiting guidance from Cabinet on the risk-adjusted strategy

Rand: Going nowhere slowly

Local rates: Partial non-comp take-up results in SAGB rally

What to watch today

• EC Trade Balance SA
• EC Employment
• EC GDP SA
• US Retail Sales
• US Nonfarm Productivity
• US Unit Labor Costs
• US Capacity Utilization
• US Manufacturing (SIC) Production
• US University of Michigan Sentiment

Covid-19 update

Source: WHO, NICD

Economics and markets

• Provision of adequate and reliable power supply is critical to growth, particularly in energy-intensive industries.
• Mining suffering the adverse consequences of lockdown.
• As we await guidance from Cabinet on the relaxation of further lockdown restrictions, we hope for the best but continue to plan for the worst.
• SA’s top virus expert has warned of the risk of a second wave if prevention measures falter.
• Investors becoming more discriminating of EM assets based on fundamental risks, placing SA at risk of further outflows.
• Mindful of the prevailing geopolitical risk, markets await clarity on negotiations with both China and the EU.
• USD/ZAR opens at 17.41; EUR/ZAR at 20.57; GBP/ZAR at 22.76 and CNY/ZAR at 2.50.

I’m intrigued by past events. This day in history is particularly fascinating, but the irony is almost cruel. In 2003, an unprecedented power outage knocked out power on the Eastern seaboard of the US and parts of Canada, impacting 50 million people. While monumental enough to be recorded in the annals of US history, the event is commonplace in SA – home to intermittent load-shedding – earning a byline at best. 

Per Eskom’s tally, the energy availability factor for the week of 3 August was at five-week lows at 68.04, but still above the year-to-date average of 66.23. The provision of adequate and reliable power supply is critical to growth, particularly in energy-intensive industries. Mining is already suffering the adverse consequences of lockdown. June’s figures were quite dismal, though exaggerated by a leakage at a platinum smelter which aggravated the y/y losses in PGMs, which holds the highest weighting in the production index. The point though is that the road to recovery is fraught with dangers, but energy availability need not be an added constraint. 

As we await guidance from Cabinet on the relaxation of further lockdown restrictions, we hope for the best but continue to plan for the worst. Encouraged by the fall in the seven-day rolling average of new cases, the number of hospital admissions and weekly deaths, business and labour have called for the liberalisation of industries still under restraints. A reasonable ask, though SA’s top virus expert has warned of the risk of a second wave if prevention measures falter, alike to China, Spain and Australia’s recent experiences. 

The difference though is that China continues to record improvements in production growth, a phenomenon that SA is yet to experience, weighing on confidence and depressing real and financial investment prospects. Investors are becoming more discriminating of EM assets based on fundamental risks, placing SA at risk of further outflows despite the return prospects on financial assets. That isn’t to say that the rest of the EM spectrum is thriving. 

Indeed, financial markets are less impressed by the recent flow of Chinese industrial production, retail sales and fixed-asset investment data, resulting in a lull in trading as we close out another exhausting (albeit shortened) week. Despite the US showing greater economic momentum through better-than-anticipated data outcomes, investors are mindful of the prevailing geopolitical risk, awaiting clarity on negotiations with both China and the EU.  

EM currencies are left unsupported as a result. Spot rand is bumbling away at USD/ZAR17.42 at the time of writing, as EUR/USD teeters near 1.18 with little to suggest that it will break meaningfully lower. The extent to which the options market is pricing in near-term rand weakness has lessened over the last week, but much depends on global happenings as local catalysts for strength remain absent. 

We’re in need of another historic event. Perhaps the US congress will oblige? 

Enjoy the weekend! 

Nema Ramkhelawan-Bhana

Local rates

The big driver of price action on Thursday was the take-up of non-comp options. Only R1.5bn R2037s were exercised out of the total R6.6bn non-comps on offer, and this resulted in bonds finally being able to pull off a rally. The belly of the bond curve benefited the most as these bonds have repriced a fair amount after Tuesday’s auction. The poor mining manufacturing numbers didn't affect the bonds significantly, indicating that the bond market has already priced in a fair amount of negative sentiment. 

One of the big drivers for SAGB price action going forward will be SAGBs’ return relative to other assets. Given that short-term rates have fallen off a cliff due to the excess cash in the financial system, the front end of the bond yield curve should continue to drift lower in tandum with what we are seeing on the money market side. The FRA curve is also ticking lower on the back of excess cash and not because the market is necessarily pricing in another rate cut. 

Today, we end off with another ILB auction as the National Treasury is looking to issue R2bn in I2025s, I2038s and I2046s. Despite the quiet and shorter week, we have seen some underlying interest in inflation-linked bonds, both in the auctions as well as the secondary market. We expect this week’s auction to be well supported across all three bonds on offer and for them to clear at, or stronger than, current mark-to-market levels. 

Michelle Wohlberg