*|MC:SUBJECT|*







View this email in your browser

Morning NOTE

04 May 2023

GOOD MORNING

The ZAR gained nearly 1.80% (or 30 cents), following the Fed’s widely anticipated 25 bps rate hike.

SUMMARY

The Rand gained on the back of what is widely perceived as a FED PAUSE, following the FOMC’s latest 25 bps hike.

  • Language were significantly different in the recent speech, with the Chairman omitting “ prior language that indicated more rate hikes ahead”.
  • On Wednesday, the Fed raised the fed funds rate by 25bps to 5.25%, marking the 10th increase and bringing borrowing costs to the highest since September 2007.
    • The central bank also signalled that it may be done with a tightening cycle but during the press conference, Fed Chair Powell said the inflation outlook doesn’t support rate cuts.
    • Still, policymakers added that in determining the extent to which additional policy firming may be appropriate,
      • they will take into account the cumulative tightening of monetary policy and the  lags with which monetary policy affects economic activity and inflation.
  • The Fed ‘s decision immediately weakened the Dollar across the board.
    • The Euro, Pound, Yen and EMFX (like the ZAR), all gained vs the Buck.
    • DOLLAR 101.12 / EURUSD 1.1075
    • GOLD 2039
    • SP500 4096 **
    • US10YT 3.39
       
    • ** The SP500 was lower as the Banking crises, continuous to worry investors as share prices in America’s largest regional banks continue to fall.
      • However,
      • This would likely result in increased levels of QE as the US Treasury tries to assure depositors that their funds are safe.
      • NB: Increases in liquidity will be risk asset supportive.
  • In addition, we still have the ECB rate decision(today), as well as the US Non-farm payrolls due on Friday.

Data This week
THURSDAY

  • 09H15  SA S&P GLOBAL PMI 50.2 EXPECTED VS 49.7 PREVIOUS
     
  • 14H15 :  ECB RATE DECISION +25BPS EXPECTED 3.75 % VS 3.50% PREVIOUS
  • 14H45 : ECB PRESSER
     
  • 14H30 US INITIAL JOBLESS CLAIMS 240K VS 230K EXPECTED

FRIDAY

  • 14H30  : US NON FARM PAYROLLS 180K EXPECTED VS 236K PREVIOUS
  • 14H30  US EUNEMPLOYMENT RATE  3.6%  EXPECTED VS 3.5% PREVIOUS

Market Movement Today:

  • The Rand recovered sharply after the Fed delivered a much anticipated 25 bps and followed it up with a rather DOVISH statement.
    • The local unit gaining nearly 2% as markets repriced for a weaker Dollar going forward.
    • The local unit opening at 18.2300 vs 2 % weaker on Wednesday morning.
       
    • Fed Chair Jerome Powell also mentioned the cumulative effects of monetary policy after the FED funds reached the highest since December 2007.
    • The on-going banking crises also affecting rate policy as markets of the opinion that the Fed has gone too far and was “part cause “ of the on-going crises.
    • However yields importantly drifted lower with the 10YT 3.36%, indicating a market open to cuts in H2.
       
    • Coupled with lower CPI data we expect, rates to be on hold and this will be risk asset supportive.
    • The Rand will benefit in this environment as traders widely expected another hike from the SARB, after SA CPI remained above the MPC’s 3-6 band.
       
    • The large carry gap likely to be ZAR supportive as SA bonds continues to offer significant interest rate differential advantage.
       
  • Against this backdrop, we expect the ZAR to advance and we anticipate a stronger local unit.
     
  • Risk to this analysis  –  Friday’s NFP has a low expectancy (sub 200k), and a higher number might be Dollar supportive in the short term.
    • But the FED’s action will ultimately determine the directional bias and we anticipate this be ZAR positive.
       
  • Trade :  TRADE SELL  USDZAR ON RALLIES .

Expected Ranges:

  • USDZAR :  Expect a range 18.0500-18.4400
    • Importers : 18.1800-18.0500
    • Exporters : 18.3100-18.4400
       
  • EURZAR :  Expect a range of 20.0400-20.4000
    • Importers : 20.1600-20.0400
    • Exporters : 20.2800-20.4000
       
  • GBPZAR : Expect a range of 22.8500-22.6900
    • Importers : 22.8500-22.6900
    • Exporters : 23.0100-23.1700

OPENING RATES

  • USDZAR : 18.2200
  • EURZAR : 20.2100
  • GBPZAR : 23.0000

SOUTH AFRICA

  • President Cyril Ramaphosa said he does not feel snubbed by the G7 summit.
    • For the first time since his presidency began in 2018, Ramaphosa has not been invited to attend this year’s summit in Japan.
    • According to The Presidency, the exclusion of Ramaphosa was due to changes made to the format of the summit – which will be held later this month.
    • Over the last four years, Ramaphosa was invited to G7 summits in Canada, France, the United Kingdom and Germany.
    • But presidential spokesperson Vincent Magwenya said Ramaphosa was not slighted by not being invited by Japan. EWN
       
  • PRIME HYDRATION DRINK SELLS OUT AT SOME CHECKERS STORES
    • In scenes reminiscent of Black Friday, people across the country woke up early to queue outside Checkers stores to be the first to buy the popular drink.
    • The PRIME Hydration drink frenzy has hit the country, with some consumers reporting that it’s sold out at Checkers stores, where it’s being sold for a fraction of the initially reported price.
      • Checkers is the country’s official retail partner of the drink, which went on sale last night for almost R40 each.
      • The drink is owned by popular YouTube stars, KSI and Logan Paul.
         
  • Power crises
    • Pick n Pay misses dividend estimates as power costs increase
    • A dividend of R1.85 a share was declared for the 12 months ended February 26.
    • Pick n Pay missed dividend estimates as South Africa’s third-largest grocer incurred extra costs to keep the lights on at its stores amid nationwide power outages.
    • That compared with a R1.92 median estimate of eight analysts surveyed by Bloomberg. Sales rose 8.9% to R106.6 billion. Moneyweb

GLOBAL MARKETS

  • In regular trading on Wednesday, the Dow fell 0.8%, the S&P 500 dropped 0.7% and the Nasdaq Composite lost 0.46%.
    • US stock futures edged lower on Thursday after the Federal Reserve hiked rates by another 25 basis points and market fears of a wider contagion in the regional banking sector resurfaced.
    • Dow and S&P 500 futures fell 0.4%, while Nasdaq 100 futures shed 0.1%.
    • In extended trading, PacWest sank more than 50% following reports that the California-based bank has been weighing strategic options, including a possible sale.
    • Other regional banks also tumbled, including Western Alliance (-23%) and Zions Bancorporation (-10%).

The FED

  • Fed Chair Jerome Powell said that it will take some time for inflation to come down, and that it would not be appropriate to cut rates under such a view.
  • Investors now look ahead to initial jobless claims on Thursday and the monthly jobs report on Friday, as well as more corporate earnings reports. Cnbc

Bonds

  • US 10 Year Note Bond Yield was 3.37 percent on Thursday May 4, according to over-the-counter interbank yield quotes for this government bond maturity.
  • Yields lower across the board on the Fed’s decision to hike by 25bps what many are seeing as its final hike in the current cycle.
    • The FOMC raised the fed funds rate by 25bps to a 5.25% during its May meeting.
    • It was the 10th increase and bringing borrowing costs to their highest level since September 2007.
    • The decision came in line with market expectations.
       
  • The central bank also signalled that it may be done with a tightening cycle by taking out from the statement sentence pointing to the need for additional policy firming.
    • Policymakers added that they will take into account the cumulative tightening of monetary policy and the lags with which monetary policy affects economic activity.
    • Officials also noted that although the U.S. banking system is sound and resilient. source: Federal Reserve

Yesterday

  • DOW declined 270 to 33,414
  • SP500 lower 28 to 4,090
  • NASDAQ unchanged 12,025

  image: Trading economics

OVERNIGHT HEADLINES

The US Dollar

  • The dollar weakened toward the 101 mark on Thursday, sliding for the third straight session.
  • Traders selling the Buck after the Federal Reserve delivered a widely expected 25 basis point rate hike;
  • BUT Crucially t removed language from its policy statement that it “anticipates” further rate increases would be needed.
  • The dollar was also pressured as fears of a wider contagion in the US regional banking space returned following news that PacWest Bank has been weighing strategic options, including a possible sale.
  • Investors now look ahead to initial jobless claims on Thursday and the monthly jobs report on Friday to guide the monetary policy outlook.
  • Elsewhere, the European Central Bank is expected to tighten policy further as well on Thursday. FX news

Asian markets

  • Asian markets higher across the region, after the FED’s decision to hike rates by 25bps.
    • In Japan, the Nikkei 225 Index 0.12% to close at 29,158, with Japanese stocks struggling for direction amid weak cues from Wall Street overnight.
      • The benchmark indexes reached multi-month highs in the previous day as the BOJ’s  dovish stance spurred a selloff in the yen.
      • The yen however recovering ater the FOMC indicated that rates might have peaked.
      • Japanese stocks traded mixed on Tuesday. Japanese markets will be closed from May 3-5 for various holidays.
         
    • In China, the Shanghai Composite fell 0.2% to around 3,315, with investors adopting a cautious stance after returning from a holiday-extended weekend.
      • Mainland markets also took cues from a weak lead on Wall Street overnight after the US Federal Reserve raised interest rates further
        • BUT said the inflation outlook does not support rate cuts.
      • Domestically, a private survey showed that Chinese manufacturing activity unexpectedly contracted in April,
        • confirming official data released over the weekend and raising concerns about the strength of the country’s economic recovery.  Reuters

Crude oil

  • US WTI crude futures fell below $68 per barrel on Thursday, bringing this week’s losses to more than 11% after the US Federal Reserve raised interest rates again.
    • The Fed also indicated the inflation outlook does not support rate cuts, fuelling fears of a global economic slowdown and weaker energy demand.
    • The US oil benchmark tumbled to as low as $63.6 a barrel in early Asian trade before recouping most of the decline.
    • Russian crude exports also jumped back above 4 million barrels a day last week despite the country’s pledge to reduce production. Gulf Energy News

Gold

  • Gold continued on its record run reaching $2,040 /oz and near its highest levels on record.
  • Bullion supported as the US Federal Reserve delivered a widely expected 25 basis point rate hike BUT
    • removed language from its policy statement that it “anticipates” further rate increases would be needed.
    • The metal was also boosted by increased safe-haven demand amid rising risks of a global recession and fears of a wider contagion in the US regional banking space.
    • Gold reached as high as $2,072 an ounce in early Asian trade before giving back most of the gains. Kitco metals

Copyright ©
2023 RussellStone Treasury 
All rights reserved.

Our mailing address is:
trade@russellstone.co.za

Want to change how you receive these emails?
You can update your preferences or unsubscribe from this list.