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Morning NOTE

GOOD MORNING

The ZAR continued its recent gains after US ISM services data surprised to the downside, pushed US yields and the Dollar lower.

OPENING RATES

• USDZAR : 19.2200
• EURZAR : 20.6200
• GBPZAR : 23.9200

SOUTH AFRICA

Eskom and Diesel

• Supermarkets’ diesel bill nears R3bn in nine months
  • Major chains are incurring massive fuel and food waste costs due to rolling blackouts.
  • The largest supermarket retailers in South Africa have now spent nearly R3 billion on diesel, to enable them to run generators so they could trade through the near-constant load shedding over the past nine months.
  • The bulk of this expense came in the period between October 2022 and May 2023, as daily power cuts intensified with days-long bursts at Stage 6.
  • Together, the Shoprite Group and Pick n Pay have spent R1.1 billion in so-called “incremental” diesel costs to keep refrigerators and lights on and stores open. Moneyweb

Tanker explosion

• TSHWANE – Tshwane Emergency Management Services (EMS) said that both directions of the N1 near Botha Avenue were reopened to traffic on Tuesday morning, after a petrol tanker exploded on the highway on Monday night.
  • The vehicle driver was killed after he lost control of the vehicle, carrying 40,000 litres of petrol.
  • Tshwane EMS said that two fire engines, two water tankers, and water drainage systems were sent to clean the spill overnight. EWN

Airports SA

• Aviation head takes aim at SA for upping airport charges despite ‘inefficient’ operations
  • High airport charges in South Africa are compensating for their poor operational efficiency, according to the International Air Transport Association (IATA).
  • In his opening speech at the airline body’s annual summit, taking place in Istanbul this year,
    • IATA Director-General Willie Walsh said there were “grievous examples of some airports and air navigation service providers shifting the costs of their inefficiency to airlines”. News 24

GLOBAL MARKETS

Stocks

• US stock futures inched lower on Tuesday after the major averages finished in the red during Monday’s regular session, snapping a two-day advance on Wall Street.
  • Futures contracts tied to the three major indexes were all down at least 0.1%.
• In regular trading on Monday, the Dow declined 0.59%, the S&P 500 fell 0.2% and the Nasdaq Composite slipped 0.09%.
  • Seven out of the 11 S&P sectors finished lower, led to the downside by industrials, energy and financials.
  • Those moves came as investors as weaker-than-expected US data weighed on cyclical stocks which are sensitive to the performance of the economy

Bonds

• The yield on the US 10-year Treasury note reversed early gains to trade around 3.7%, as recent data raised some concerns about the resilience of the economy.
  • ISM Services PMI showed a bigger-than-expected slowdown in services activity last month while factory orders rose much less than market forecasts.
  • Last week, the payrolls report painted a mixed scenario, with the economy adding a remarkable 339K jobs in May while the unemployment rate rose by 0.3 percentage points to 3.7% and hourly wage growth slowed.
  • Around 80% of market participants expect the Fed to leave rates steady when it meets next week,
    • but traders now seem to be divided regarding the July move, with only around half expecting a 25bps rate increase, compared to 56% prior to the ISM Services release.
  • Meanwhile, President Biden signed the new debt bill into law on Saturday, avoiding a US default and the Treasury Department is now set to resume new debt issuance.
    • Markets estimating that the Treasury needs to raise close to $1TN in issues.

Yesterday

• DOW  – 199 to 33,562
• SP500  minus 8 to 4,273
• NASDAQ  minus 11 13,229

  image: Trading economics

OVERNIGHT HEADLINES

The US dollar

• The dollar index held below 104 on Tuesday, remaining under pressure after surprisingly soft US services data for May supported the case for the Federal Reserve to pause its interest rate hikes at next week’s policy meeting.
  • Some Fed officials previously suggested that the central bank might skip a rate hike in the upcoming meeting but emphasized that such a decision should not be interpreted as the end of the tightening cycle.
    • Around 80% of market participants expect the Fed to leave rates steady when it meets next week, but traders now seem to be divided regarding the July move.
    • Around half are expecting a 25 basis point rate increase, compared to 56% prior to the ISM Services release.
    • Meanwhile, the latest payrolls report painted a mixed scenario,
      • with the economy adding a remarkable 339K jobs in May while the unemployment rate rose by 0.3 percentage points to 3.7% and hourly wage growth slowed.

Asian markets

• Asian markets mixed this morning, following weaker than expected economic data out of the USA . Traders unsure about next week’s Fed decision
  • In Japan, the Nikkei 225 jumped 0.9% to close at 32,507, hovering at their highest levels in over three decades.
  • Traders citing a weak yen as a boost for the corporate outlook for Japan’s export-heavy industries and made local assets more attractive to foreign investors.
    • Market enthusiasm over semiconductor, artificial intelligence and related technologies also lifted Japanese stocks which have outperformed global peers in May.

Crude oil

• WTI crude futures fell below $72 per barrel on Tuesday, erasing all the gains made during Monday’s session after Saudi Arabia pledged to reduce output by another 1 million barrels per day from July at an OPEC+ meeting held over the weekend.
  • That would bring the country’s production level to around 9 million bpd, the lowest in years, with Saudi Energy Minister Prince Abdulaziz bin Salman saying he “will do whatever is necessary to bring stability to this market.”
  • However, analysts suggested that the new reductions may not have a significant impact as production levels in other OPEC+ member countries including Russia, Nigeria and Angola remained high.
  • Moreover, Russia made no commitment to reduce output further, while the United Arab Emirates was allowed to raise output targets for next year.
  • On the demand side, investors continued to assess the economic and monetary policy outlook globally, amid growing expectations that the US Federal Reserve would raise interest rates further. Gulf Energy news

Gold

• Russia sells gold and yuan from its National Wealth Fund to finance budget deficit.
  • Russia’s central bank sold four tonnes of gold and 2.59 billion yuan (USD$365 million) from the National Wealth Fund (NWF) accounts to raise additional money to finance the budget deficit, according to the Finance Ministry.
  • The sale took place in May and helped allocate 48.97 billion roubles (USD$606 million) to fund the deficit.
     
• Gold prices steadied around $1,960 an ounce on Tuesday, holding its recent advance following a modest weakening of the US dollar and a minor decline in US Treasury yield.
  • Weak economic data in the US reinforced the view that the Fed will pause the tightening cycle next week.
  • Still, gold prices remain significantly below the near-record-high of $2,050 reached on May 5^th.
  • Traders are anticipating that interest rates will need to remain elevated for an extended period in the US, Europe, and the UK due to persistent inflationary pressures. Kitco metals