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Morning NOTE

14 October 2022

GOOD MORNING

The ZAR endured a volatile session following the release of the US CPI, that came in hotter than expected.

SUMMARY

The Rand traded in wild swings to, endure a 40 cent range, after initially weakening to 18.5800, following the release of the US CPI Data.

  • What followed was an unexpected Risk rally, after a “bargain hunt on stocks” rally, caused program “buy trade” orders to get triggered.
    • The Dow at once stage was down more than -500 points before ending the session +827 points.
    • Risk assets following the lead from Wall street and the ZAR benefiting from this move and rallying strongly from a low of 18.5800 to 18.1600 (at the time of writing).
    • The result a 2.26% gain for the local unit.
       
  • Bond yields also retreating with the US 10YT once again below 4%, and the Dollar falling across the board.
    • The Euro, UK pound all gaining EXCEPT THE YEN.
    • The Japanese currency continues to plummet vs the Dollar and reached 147.38, a level not seen since August 1990.
      • This is on the back of divergent monetary policy between the FED and the BOJ.
      • Thus:  for all the optimism, IT IS HIGHLY UNLIKELY THAT THIS RISK BULL RUN WILL CONTINUE.
      • AND IT REMAINS TO BE JUST ANOTHER BEAR MARKET RALLY.

 
The drivers will remain US CPI, and this was confirmed higher with markets pricing in another 75 bps hike at the next FOMC meeting.
This will ensure the Dollar remains well supported.
 

  • Locally, SA mining production indicated a sector that continues to contract .
    • STATS SA, indicating Mining production fell by 5.9% YoY in August of 2022, after a downwardly revised 8.2% fall in the previous month.
      • It was almost in line with market forecasts of a 5.95% contraction.
    • It marks the 7th consecutive month of falling mining activity, as strikes and the ramp-up of load-shedding in the country have weighed heavily on the energy-intensive sector. 
       

Significant Market Data
 
Friday

  • 14h30 : US RETAIL SALES 8% YOY EXPECTED VS 9.1% PREVIOUS

Today

  • The ZAR opened aggressively stronger after the Risk rally in New York.
    • This morning, with some exporters panicking, we could see a push towards 18.0800, but unlikely to be sustained. 
    • With this in mind a drop towards the bottom of the weekly range (17.9800), likely to provide USDZAR support and present USDZAR buying opportunities.
    • Likewise, a break of the Asian high of 18.2600 will ensure we target at least 18.3600, as reality sets in and the risk rally once again fade in the face of a rampant FED.
       
  • After a strong Dollar run and aggressive profit taking, don’t expect the same degree of volatility today, as markets take a breather and look for more clues.
     
  • This likely to be US retail sales this afternoon at 14h30.

Important :

  • The drivers will continue to be US INFLATION (HIGHER AGAIN) AND US FED POLICY.
  • It is important not to lose sight of this and levels closer to R18/$, presents opportunities for importers to exact cover.
  • The wide weekly range of 17.9800-18.5800, once again showing a market that is HIGHLY UNCERTAIN, around future direction.

Expected Ranges

  • USDZAR :  Expect a range 18.0900-18.4500
    • Importers 18.2100-18.0900
    • Exporters 18.3300-18.4500
       
  • EURZAR :  Expect a range of 17.6500-17.8400
    • Importers 17.7100-17.6500
    • Exporters 17.7800-17.8400
       
  • GBPZAR :  Expect a range of 20.1600-20.4000
    • Importers 20.2400-20.1600
    • Exporters  20.3200-20.4000

OPENING RATES

  • USDZAR 18.3000
  • EURZAR 17.7500
  • GBPZAR 20.2700

SOUTH AFRICA

  • Eskom COO Jan Oberholzer has painted a grim picture of energy security in the country.
    • With rolling power cuts part of the daily routine for all South Africans,
      • The power utility says the country can expect to experience consistent power cuts for another 12 to 18 months.
      • Oberholzer made the grim projection during day one of Agri SA’s congress in Pretoria on Thursday.
    • The country is currently on stage two power cuts, which will be downgraded to stage one on Friday evening. EWN
       
  • The crippling Transnet strike continues, with Unions once again rejecting another offer from the SOE.
    • On Thursday, Transnet offered the unions a 3-year wage offer, which entails a 4.5% across-the-board increase in the current year and a 5.3% increase in the two later years but unions have rejected this.
      • Workers stand by their demands for a wage increase of 12% and 13%.
      • Transnet have also approached Ramaphosa to declare port workers as essential and thus not able to strike.
      • This is unlikely to happen. News24
         
  • With no end in sight for power cuts, there are now serious concerns about the provision of water in Gauteng.
    • Frequent power cuts and hot weather have seen water levels run low at a number of reservoirs.
      • As a result, the outflow has been reduced, with Sandton and Midrand are the latest areas to be affected.
      • Rand Water has placed 30% restrictions on 14 reservoirs, while outlet valves at 11 others have been reduced by 50%.
    • Meanwhile, Johannesburg is not alone in being warned to watch water consumption.
      • Tshwane is also facing water supply problems, while Ekurhuleni residents say they have seen water cuts often follow power cuts. IOL 

 

GLOBAL MARKETS

  • The Dow added 827 after recovering from an over 500-point drop earlier in the session.
    • Traders citing dip buyers, after an inflation-driven selloff.
      • US inflation eased less than expected in September, while the core gouge excluding energy and food prices accelerated to a new four-decade high.
    • The gains were led by banks and energy shares as oil prices rose.
    • In regular trading on Thursday, the Dow and S&P 500 rallied 2.83% and 2.6%, respectively, while the Nasdaq gained 2.23%.
       
  • On Friday US stock futures climbed higher still after the major averages staged a dramatic reversal rally during Thursday’s session.
    • Investors shifted their focus to earning reports from major banks for insights on the state of the economy.
    • Those moves came following the release of hotter than expected US inflation numbers for September.
    • It  initially triggered a market selloff as it cemented the view that the Federal Reserve would push ahead with its aggressive tightening plans.
       
    • Stocks then came roaring back in what analysts attributed to various factors, including technical levels that triggered programmed buying. 
       
    • Investors now await earning from JPMorgan, Wells Fargo, Morgan Stanley and Citigroup, among others.  CNBC

Bonds:

  • US 10 Year Yield declined to 3.94% on Friday October 14, after markets reversed sharply following the worse than expected US CPI.
    • Traders trying to digest the reversal after CPI confirmed the fetch will continue to hike aggressively.
       
  • In the UK, the yield on the 10-year Gilt fell to below 4.2% on Thursday.
    • This after reports that UK officials are discussing ways to backtrack on economic plans.
    • Meanwhile, the Bank of England confirmed on Wednesday the emergency bond-buying scheme will end on Friday as expected.
    • On Wednesday afternoon, the Bank of England bought nearly £4.4 billion of gilts, including both conventional bonds and inflation-linked securities, helping calm the market. Reuters

YESTERDAY

  • The Dow added 827 to 30,038
  • The SP500 gained 92 to 3,669
  • The Nasdaq  added 232 to 10,649

OVERNIGHT HEADLINES
 

  • Asian markets rallied across the board, following a sharp reversal on Wallstreet, stocks rebounding after a dramatic sell-off following higher than expected US CPI.
    • In Japan, the Nikkei 225 rallied nearly 3% toward 27,000,  recouping much of the losses from earlier this week and taking the lead from a sharp turnaround rally on Wall Street overnight.
      • This even after US inflation data came in higher than expected in September.
      • Technology stocks led the advance, with strong gains and all other sectors were all up in morning trade.
      • Despite Friday’s gains, the benchmark indexes are still on track to end the week slightly lower.
    • In Australia, the ASX 200 jumped 1.75% to close at 6,759, erasing losses from earlier in the week and lifted by strong gains in mining, energy and bank stocks.
      • Shares also tracked a sharp reversal rally on Wall Street overnight despite higher-than-expected US inflation numbers for September.
      • Energy firms led the charge on higher oil prices, with sector leaders Woodside Energy and Santos Ltd surging 4.4% and 4.4%, respectively.
      • Heavyweight miners also advanced on firmer metals prices, including BHP Group (2.1%), Rio Tinto (0.9%) and Fortescue Metals (0.6%).  Reuters
         
  • The US dollar index held just above 112 on Friday after falling sharply in the previous session.
    • An unexpected risk rally after damaging inflation reports drove down the dollar.
      • With global equities roaring higher, while investors assessed red-hot US inflation data that cemented bets of another outsized Federal Reserve rate hike next month.
    • Data released on Thursday showed that US inflation eased less than expected in September to 8.2%.
    • This all while underlying prices excluding energy and food prices accelerated to a new four-decade high.
    • Markets are currently betting that the Fed will deliver its fourth straight 75 basis point rate increase in November.
      • The dollar nursed heavy losses against the euro and the sterling, with the latter also benefiting from speculations of a policy U-turn in the UK. Forex News
         
  • Brent crude oil steadied above $94/bl on Friday but were still down about 3.5% so far this week.
    • With prices under renewed pressure from a weakening demand outlook due to surging inflation, tightening financial conditions and mounting risks of a global recession.
    • Earlier this week, the OPEC, US Energy Department and International Energy Agency all slashed their global oil demand forecasts in their monthly reports.
    • Highlighting softer demand, official data showed that US crude inventories surged by 9.9 million barrels last week, way more than market expectations for a 1.8 million barrel rise.
    • The UK oil benchmark rallied 15% last week after OPEC+ agreed to a large supply cut, but the IEA warned that resulting price spikes could tip the global economy into recession. Gulf energy news
       
  • Gold prices steadied near $1,670/oz, remaining sideways for the 4th session despite getting whipsawed on Thursday.
    • With  hotter-than-expected US inflation report bolstered bets of another outsized Federal Reserve rate hike next month.
      • Data released on Thursday showed that US inflation eased less than expected in September to 8.2%.
      • Earlier this week, a drumbeat of US policymakers reiterated the need to lift rates to restrictive levels and hold them there until inflation recedes.
      • Due to its weak position in an environment of rising interest rates, investors continued to opt for the dollar as a safe store of value. Kitco metals

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