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Morning NOTE

17 January 2023

GOOD MORNING

The ZAR weakened aggressively in thin market conditions as traders booked profits and banks chased stops.

SUMMARY

  • The Rand weakened dramatically on a day where liquidity was hard to come by.
    • The American Martin Luther King Jr holiday, behind the low liquidity, where prices moved dramatically throughout the session.
       
  • After opening at 16.7400 the ZAR reached a low of 17.1200 (previous week’s High) as algos dominated the trading landscape.
    • Traders citing nervousness around the Zuma v Ramaphosa court case as well as some “minor” risk aversion in Asia behind the stop-loss spiral.
       
  • Today, we expect more “normal“ price action, with the major centres returning to the market.
    • Investors also firmly focused on tomorrow’s set of inflation data and the implications for future interest rate hikes in 2023.
    • Markets continued to price the Fed for a meagre 25 bps hike, after the FOMC relented and only hiked 50 bps in December 2022.
       
  • The continued load shedding as Eskom struggles to provide electricity to the country also being mentioned as a reason for the ZAR lagging behind in gains vs the US Dollar.
    • All major currencies significantly higher vs the Greenback with the Yen, Euro, Aussie and Kiwi-dollar posting multi-month highs.
       
  • On the data front SA mining and gold production along with manufacturing, likely to show  continued to struggles due to their inability to secure a stable supply of electricity.

Data this week

Tuesday

  • 11h30 :   SA MINING PRODUCTION  -15% F/CAST VS -10.4% YOY PREVIOUS
  • 11H30: SA GOLD PRODUCTION -8% F/CAST VS -6.3% YOY PREVIOUS

 
Wednesday

  • 09H00 : UK INFLATION 10.6% YOY EXPECTED VS 10.7% PREVIOUS
  • 09H00 : UK CORE INFLATION  6.3% YOY EXPECPTED VS 6.3% PREVIOUS
     
  • 10H00 : SA INFLATION 7.5% YOY EXPECTED VS 7.4 % PREVIOUS
  • 10H00 : SA CORE INFLATION  4.8% YOY EXPECPTED VS 5% PREVIOUS
     
  • 12H00 : EURO INFLATION 9.2% YOY EXPECTED VS 10.1% PREVIOUS
     
  • 13H00 : SA RETAIL SALES -0.3% EXPECTED  VS -0.6% YOY PREVIOUS  
     
  • 15H30: US PPI 6.8% YOY EXPECTED VS 7.4% PREVIOUS
  • 15H30: US CORE  PPI 5.6% YOY EXPECTED VS 6.2% PREVIOUS
     
  • 16H00:  FED SPEAKERS – BOSTIC
  • 16H30 : FED SPEAKERS – BULLARD

Market Movement Today:

  • The Rand remained around the R17/$ level following Monday’s decline.
    • This morning we opening inside the previous session’s range, with Risk aversion in Asia driving price action.
    • We expect some weakness early on due to negative risk sentiment.
       
  • We also have Equity futures lower as WEF participants all talk about an impending recession.
    • However, tomorrows PPI out of the USA likely to reverse price action, if it prints lower.
       
  • It is important to note that INFLATION and INTEREST RATES determine currency markets
    • As illustrated by the sharp advance in the Japanese Yen.
       
  • The weekly round of inflation data likely to show that inflation has turned and we continue to expect a stronger ZAR.

 
TRADE : SELL USDZAR ON RALLIES
 

Expected Ranges:

  • USDZAR :  Expect a range 17.1800-16.8800
    • Importers 16.9800-16.8800
    • Exporters 17.0800-17.1800
       
  • EURZAR :  Expect a range of 18.3400-18.5500
    • Importers 18.4100-18.3400
    • Exporters 18.4800-18.5500
       
  • GBPZAR :  Expect a range of 20.6600-20.9000
    • Importers 20.7400-20.6600
    • Exporters 20.8200-20.9000

OPENING RATES

  • USDZAR 17.0200
  • EURZAR 18.4500
  • GBPZAR 20.7600

SOUTH AFRICA

  • Eskom hopes the return to service of 14 generators will ease pressure on the electricity grid.
    • The SOE announced the drop in the load shedding level, after the country experienced six days of continuous stage 6 power cuts.
    • Stage 4 power cuts have kicked in on Tuesday morning.
    • Eskom on Monday announced the drop in the load shedding level after the country experienced six days of continuous stage 6 power cuts. IOL

 
Water crises

  • Gauteng’s water supply is now at risk of running dry due to rolling power cuts.
    • The City of Joburg and Tshwane say that their water towers are taking strain due to the prolonged power cuts,
    • In addition, the scorching temperatures have caused an increased demand for water.
    • Both metros say that reservoirs are not filling up fast enough.
    • While Eskom has implemented power cuts to avoid a possible collapse of the electricity grid, the power cuts have affected services, including water supply.
    • Some water pump stations in Johannesburg and Tshwane need a consistent supply of electricity to feed the metro’s water towers. News24

 
Eskom & Law suits

  • Several high-profile lawyers, leaders, and NPOs have threatened Eskom CEO Andre de Ruyter and Public Enterprises Minister Pravin Gordhan,
    • with legal action following their failure to provide a stable power supply to the country. 
  • The letter issued to De Ruyter and Gordhan on Monday, was addressed by Mabuza Attorneys and at least six other law firms .
    • The legal team said their clients instructed them to demand that load shedding be stopped with immediate effect and, if not, a full explanation of why the government could not stop it.
    • Lastly, the lawyers demanded the 18.65% increase granted by NERSA should not be implemented, pending the determination of the court challenge their clients intended to institute.
    • Eskom and Gordhan have until 20 January to respond to the letter to avoid legal action. EWN

 
Zuma v Ramaphosa

  • The Gauteng High Court in Johannesburg granting President Cyril Ramaphosa an interdict to halt the private prosecution brought by former president Jacob Zuma is a “travesty of justice”. 
  • This is according to Jacob Zuma Foundation spokesperson Mzwandile Manyi, who was addressing the media after the judgment was handed down on Monday morning.
  • Manyi said Zuma’s lawyers would map a way forward following the ruling.  EWN

GLOBAL MARKETS

  • On Tuesday, US stock futures eased as investors assessed whether the recent rally could continue higher given the deteriorating outlook for growth,
  • while awaiting more corporate earnings that could provide clues on US economic activity.
  • Futures contracts tied to the three major indexes drifted flat to slightly negative.
  • All three major averages are positive so far this year, with the Nasdaq Composite rallying 5.85%, while the S&P 500 and Dow are up 4.16% and 3.49%, respectively.

Bonds:

  • The US 10-year Treasury yield, rose to 3.55% after finding a base around 3.5%.
  • The yield closing in on its lowest level since last September, as prospects of a less aggressive Federal Reserve boosted appetite for government debt.
  • Concerns mount that the US is heading for a recession this year, with several sectors of the economy, including housing, industry, and, more recently, services, flashing recessionary signs.
  • Money markets are now pricing an over 90% chance that the US central bank will hike rates by 25 basis points in February 2023.

Yesterday
**US MARKETS CLOSED

OVERNIGHT HEADLINES

The US Dollar recovered slightly to trade at 102.50 after risk aversion hit markets as well as poor liquidity conditions on Monday.

  • The WEF currently seeing major economists predicting a recession for 2023.
  • The decline in global inflation and in particular the USA, will likely lead to a pause in Fed action and result in a decline in the US Dollar.
    • The Dollar remained close to its lowest levels in over seven months after US annual inflation slowed for a sixth straight month to 6.5% in December, in line with market forecasts.
    • That was also the lowest reading since October 2021, raising hopes that inflation peaked in June at 9.1%.
    • The data cemented expectations that the Fed will downshift to a smaller 25 basis point interest rate hike in February after delivering a half-percentage point increase in December. 
    • Traders also waiting for US PPI data tomorrow after the CPI in the US slowed for a sixth straight month to 6.5% in December, in line with market forecasts.

Asian markets

  • In Japan the Nikkei 225 rose 1.23% to close at 26,139, snapping a two-day decline amid a slight yen pullback.
    • Traders looking ahead to the Bank of Japan’s monetary policy decision.
      • Japanese stocks dropped in the past two sessions as 10-year JGB yields continue to test the upper ceiling of the central bank’s tolerance range,
        • Price action fuelling concerns that the BOJ might tweak its yield control policy again this week
      • However, investors remain cautious despite signs that inflation may have peaked in the US.
  • In Australia the ASX 200 lost 0.03% to close at 7,386 on Tuesday, retreating slightly from over eight-month highs.
    • Traders happy to book some profits ahead of tomorrows US PPI report. 
      • Leading the move lower were mining and energy stocks on the back of softer commodity prices.
      • Despite signs that inflation may have peaked in the US,
      • Investors continued to worry that aggressive policy tightening by the Fed and other G7 central banks could tip the global economy into recession.

Crude oil

  • The international crude oil benchmark, Brent fell below $85/bl, breaking a recent winning streak as recession fears dominated market sentiment.
  • The World economic forum (WEF), World Bank and major US companies sounding the alarm about a potential slowdown this year.
  • However, ever improving demand outlook in top crude importer China and the country’s better-than-expected economic growth in the fourth quarter kept oil prices supported.
  • Investors now look ahead to market outlook reports from OPEC on Tuesday, followed by the IEA on Wednesday.

Gold remained above $1,900/oz on Tuesday, hovering close to its strongest levels since April last year as easing US inflation.

  • Traders also awaiting US PPI data tomorrow after the annual inflation rate in the US slowed for a sixth straight month to 6.5% in December, in line with market forecasts.
  • That was also the lowest reading since October 2021, raising hopes that inflation peaked in June at 9.1%.
  • Investors are mostly expecting the central bank to downshift to a smaller 25 basis point rate hike in February.
  • Gold is highly sensitive to the rates outlook as higher interest rates raise the opportunity cost of holding non-yielding bullion, and vice versa.

 

 

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