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Morning NOTE

02 June 2023

GOOD MORNING

The ZAR strengthened nearly 1.70% to reach 19.5700 after trading at a record low of R19.9000/$ on Thursday.

SUMMARY

The Rand recovered sharply as stops were triggered following mixed US economic data.
The US ADP (private payrolls) surprising with stronger than expected jobs BUT US Manufacturing PMI’s that reported lower than expected.

The PMI’s sending Dollar yields lower and sparking off a rather unexpected Risk Rally.

  • The SP500 gaining nearly 1.50% from a low of 4170 to reach 4230.
  • Gold traded higher to reach $1980/oz
  • And the US10YT yield declined to 3.60% after reaching 3.84% last week.
  • In addition the Dollar declined across the board to 103.50 and the index once again below 104.
  • The carnage and volatility due to the continuous and irresponsible Fed speakers continued.
    • Last week we had a chorus of Hawks (causing large risk asset sell-offs)
      • And this week, we have predominantly Doves (calling for pauses in the rate hiking cycle).
      • Gone are the days where only the Governor (Alan) Greenspan spoke on monetary policy) to ensure market stability and credibility to the FED.
      • Under Powell, its been complete policy nightmare.
    • Example; Fed officials raised bets the central bank will pause its tightening cycle in June.
      • Fed Governor Philip Jefferson and Philadelphia Fed President Patrick Harker suggested this week the central bank would skip a rate hike in the next meeting,
        • but qualified that any decision to hold rates steady should not be viewed as the end of the tightening cycle. 
        • This directly contradicts Bullard, Williams and Mester, just last week.

Today, we have the US NON FARM PAYROLLS expected is 190k vs 253k previous
Markets this morning

  • USDZAR 19.6000
  • DOLLAR 103.500
  • EURUSD 1.0770
  • SP500 4,230
  • GOLD 1978
  • US10YT 3.60%

Data This week
FRIDAY

  • 14H30 : US NON FARM PAYROLLS +195K EXPECTED +253K PREVIOUS
  • 14H30 : US UNEMPLPOYMENT RATE 3.5% EXPECTED VS  3.4%

Market Movement Today:

  • The Rand recovered sharply to reach 19.6000 in early trading following a drop in US yields.
    • Mixed US data halting the Dollar rally and allowed for some breathing space for risk assets.
    • The SP500, Gold and EMFX gaining across the board.
       
  • However, Today’s NON FARM PAYROLLS  likely to add more risk to the equation.
    • Markets are priced for 190k, but recently anything below 190k has surprised to upside in support of the Dollar.
       
  • Markets also closely watching the meeting of BRICS foreign minsters in SA.
    • The foreign ministers met against the backdrop of how South Africa would deal with the attendance of Lavrov’s president, Vladimir Putin.
    • SA remains under pressure to take a stance on its treatment of Putin should he travel to the country in August to attend the Brics summit.
    • The Reserve bank warned earlier in the week of the threat of sanctions and trade.
       
  • For now lower yields supporting the entire Risk complex vs the Dollar
    • But the Risk remains US payrolls this afternoon.
       
  • Trade Buy USDZAR  as we approach the NFP

Markets

  • USDZAR 19.6000
  • DOLLAR 103.500
  • EURUSD 1.0770
  • SP500 4,230
  • GOLD  1978
  • US10YT 3.60%
  • Trade : BUY DIPS ON USDZAR

Expected Ranges:

  • USDZAR : Expect a range 19.4500-19.7500
    • Importers : 19.5500-19.4500
    • Exporters : 19.6500-19.7500
       
  • EURZAR : Expect a range of 20.9900-21.2300
    • Importers : 21.0700-20.9900
    • Exporters : 21.1500-21.2300
       
  • GBPZAR : Expect a range of 24.4200-24.7200
    • Importers : 24.5200-24.4200
    • Exporters : 24.6200-24.7200

OPENING RATES

  • USDZAR : 19.5800
  • EURZAR : 21.0900
  • GBPZAR : 24.5500

SOUTH AFRICA

BRICS RUSSIA PUTIN

  • Russia’s foreign minister Sergey Lavrov said Brics (Brazil, Russia, India, China and South Africa) symbolised the evolution of a multipolar world.
  • He was part of the delegation of foreign ministers who met in Cape Town in preparation for the 15th Brics Summit in South Africa later in 2023.
  • The foreign ministers met against the backdrop of how South Africa would deal with the attendance of Lavrov’s president, Vladimir Putin.
  • South Africa is under pressure to take a stance on its treatment of Putin should he travel to the country in August to attend the Brics summit.
     
  • Meanwhile, International Relations Minister Naledi Pandor said that government was still weighing up its legal options.
    • This was in response to Russian President Vladimir Putin’s pending visit to South Africa for the BRICS Summit in August.
    • Pandor is hosting the foreign affairs ministers of BRICS nations in Cape Town on Thursday afternoon in preparation for that summit.
    • As a signatory to the Rome Statute, SA is facing the conundrum of acting on an arrest warrant issued for Putin by the International Criminal Court (ICC). EWN

Eskom

  • Eskom sales seen falling 2% per year as private power grows
  • The power utility has implemented rotational blackouts on all but one day this year.
  • South Africa’s independent power producers are eating into Eskom’s electricity sales, which are projected to fall 2% per year between now and 2027, according to Fitch Ratings.
  • Pressure on sales volumes is one of the factors that could lead to a deterioration in Eskom’s liquidity and funding access, and a downgrade in the utility’s credit rating, Fitch said in a statement this week. Moneyweb

GLOBAL MARKETS

Stocks

  • US stock futures inched up on Friday as investors look ahead to the May jobs report that could affect the economic and monetary policy outlook.
    • Futures contracts tied to the three major indexes were all up about 0.1%.
      • In regular trading on Thursday, the DOw gained 0.47%, the S&P 500 jumped 0.98% and the Nasdaq Composite rallied 1.28%.
        • Traders citing, with nine out of the 11 S&P sectors finishing higher led to the upside by technology.
        • Those gains came as the House passed the debt ceiling bill late on Wednesday, advancing it to the Senate ahead of the June 5 deadline.
           
    • Fresh ISM data also showed manufacturing activity contracted for the 5th consecutive month and price pressures eased significantly,
      • reinforcing bets the Fed will pause the tightening cycle this month. REUTERS

Bonds

  • US 10 Year Note Bond Yield was 3.62 percent on Friday June 2.
  • Yields lower after Fed governors called for a dovish outlook to the FED’s policy
    • Federal Reserve officials raised bets the central bank will pause its tightening cycle in June.
      • Fed Governor Philip Jefferson and Philadelphia Fed President Patrick Harker suggested this week the central bank would skip a rate hike in the next meeting,
        • but qualified that any decision to hold rates steady should not be viewed as the end of the tightening cycle.

Yesterday

  • DOW +153 to 33,061
  • NASDAQ +165 to 13,100
  • SP500 + 42 to 4,221

  image: Trading economics

OVERNIGHT HEADLINES

The US dollar

  • The Dollar index steadied around 103.5 on Friday but was still headed for its first weekly drop in four.
  • Comments from some Federal Reserve officials raised bets the central bank will pause its tightening cycle in June.
    • Fed Governor Philip Jefferson and Philadelphia Fed President Patrick Harker suggested this week the central bank would skip a rate hike in the next meeting,
    • However, he qualified that any decision to hold rates steady should not be viewed as the end of the tightening cycle.
    • Meanwhile, ISM data showed US manufacturing activity contracted for the 5th straight month, though jobs figures continued to point to a strong labour market.
    • Investors now look ahead to the May jobs report for further clues on the economy and monetary policy.
    • Elsewhere, the House of Representatives approved the Fiscal Responsibility Act of 2023 on Wednesday evening.
    • The bill is now headed to the Senate and is expected to be approved before the June 5 default deadline. FX news

Asian market all tracking Wall Street higher.

  • In Japan, the Nikkei 225 Index rose 0.6% to above 31,300 rising for the second straight session and tracking gains on Wall Street overnight as the US debt ceiling bill was passed by the House of Representatives.
    • The benchmark indexes also climbed back toward 33-year highs, after Japanese stocks outperformed global peers in May on strong domestic earnings and a weak yen.
      • Notable gains were seen from index heavyweights such as Toyota Motor (2%), Rakuten Group (1.6%), Nintendo (1.6%).
         
  • In China, The Shanghai Composite gained 0.5% to around 3,220, rising for the second straight session and tracking global peers higher.
    • Sentiment improved after the US House of Representatives passed a bill to raise the debt ceiling.
      • Domestically, hopes for further policy support also buoyed mainland stocks as mixed economic data in China pointed to an uneven post-pandemic recovery.
      • Artificial intelligence-related and other technology stocks led the charge. Reuters

Crude oil

  • US WTI crude futures steadied near $70 per barrel on Friday but were still set to lose more than 3% this week as demand concerns and an uncertain outlook for OPEC+ production policy weighed on the market.
  • OPEC+ is set to meet over the weekend to decide on output policy, where investors remain split on whether the group would cut production further following mixed signals from key officials.
  • A pessimistic economic outlook in China also continued to weigh on commodity prices after the world’s second-largest oil consumer posted mixed PMI figures for May.
  • Elsewhere, EIA data showed the US crude inventories jumped by 4.5 million barrels last week, defying forecasts for a 1.4 million barrel decline.

Gold

  • Gold steadied above $1,960 an ounce on Thursday, holding its recent advance as traders reassessed the US Federal Reserve’s interest rate outlook.
    • US yields were lower following dovish comments by certain Fed governors.
    • He added that any decision to hold rate steady should not be viewed as the end of the tightening cycle.
    • Markets have now trimmed the chances that the Fed will raise rates by 25 basis points to only 26%, just a day after seeing a 67% chance.
      • Kitco metals

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