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Morning NOTE

19 September 2022

GOOD MORNING

The ZAR opening the week on the backfoot near weakest levels on the back of major central bank decisions as well as Eskom.

SUMMARY

  • The Rand opens the week  at 17.6900 , ahead of what will be a very important week for the local unit .

  • The ZAR facing major headwinds after Eskom  announced stage 6 on the weekend.
    • The SOE announcing President Cyril Ramaphosa has cut his overseas trip short to return to South Africa amid the energy crisis.
    • He will fly home after Queen Elizabeth’s funeral on Monday.
  • In addition, the world awaits major central bank rate decisions.
    • First up is the US FED and FOMC on Wednesday with markets expecting 75, but some scope for 100 remains.  
    • This is followed by the SA Reserve Bank MPC rate decision on Thursday, where the market expects 75 bps as well.
  • NB: Currently both Central banks are expected to raise by 75 bps.
    • NB:  the SARB NEEDS TO AT LEAST MATCH THE FED DECISION,
    • THIS WILL ALLOW THE ZAR TO MAINTAIN THE ZAR CARRY GAP  AND AVOID AN EVEN  MORE RAPID DECLINE IN THE LOCAL UNIT.
  • Data wise, we also have SA inflation Wednesday, which could also influence the decision by the SA MPC.

Significant Market Data

TUESDAY :

  • 14h30 : US HOUSING STARTS  +1.45 Million expected vs 1.44mio previous.
    • *** ( the US housing sector indicating the health of the economy especially after continued rate hikes by the Fed.)

WEDNESDAY

  • 10H00 :  SA INFLATION 7.5% YOY EXPECTED VS 7.8% PREVIOUS YOY
  • 10H00 :  SA CORE  INFLATION 4.7% YOY EXPECTED VS 4.6% PREVIOUS YOY
  • 20H00 : US FED RATE DECISION +75 BPS EXPECTED – FED FUNDS MOVING FROM 2.5% TO 3.25%
  • 20H30 : US FED CHAIR ADDRESSES THE MEDIA

**  Jerome Powell’s language will once again be under intense scrutiny for future rate hikes.
 

THURSDAY

  • 09H30 : SNB ( SWISS CENTRAL BANK) +75 BPS  . ( ** the Swiss moving from negative rates to positive is significant).
    • NB  -0.25 % PREVIOUS TO +0.50%
  • 13H00 : BOE MPC  RATE DECISION +50 BPS EXPECTED
  • 15H00 : SARB MPC  RATE DECISION +75 BPS EXPECTED  
    • **  REPO FROM 5.5% TO 6.25%, PRIME FROM 9% TO 9.75%

FRIDAY :

  • 20H00 :  US FED CHAIR JEROME POWELL SPEECH

Today

  • This morning we are once again weaker with 17.8000 firmly on the cards.
  • The ZAR vulnerable due to local ESKOM power cuts, but more significantly, Global Central Bank Rate decisions.
    • The SARB, as well as the FED, BOE and SNB all expected to hike rates and drain more liquidity from the global financial system.
      • This all to combat sticky inflation as central bankers try to reverse their policy mistakes of 2021, where they all used “transitory” as the inflation buzz word.
      • Markets all cautious, with stocks lower, bond yields higher and EMFX under pressure vs a rampant Dollar.
         
  • NB: It is unlikely the ZAR will benefit in this environment and we expect RISK ASSETS TO REMAIN UNDER PRESSURE.
  • It is vital for the SARB to at least match the FED to avoid further weakness in the local unit .
  • Trade:  BUY USDZAR

Expected Ranges

  • USDZAR :  Expect a range 17.5800-17.9400
    • Importers 17.6800-17.5800
    • Exporters 17.8200-17.9500
  • EURZAR :  Expect a range of 17.5000-17.8000
    • Importers 17.6000-17.5000
    • Exporters 17.7000-17.8000
  • GBPZAR :  Expect a range of 20.0500-20.3500
    • Importers 20.1100-20.0500
    • Exporters  20.2500-20.3500

OPENING RATES

  • USDZAR 17.6800
  • EURZAR 17.6500
  • GBPZAR 20.1700

SOUTH AFRICA   

  • Eskom’s constrained electricity system is almost on its knees.
    • The utility is now implementing Stage 6 blackouts.
      • It says this is due to the tripping of generating units at Kusile and Kriel power stations.
        • Stage 6 was implemented at 4am on Sunday.
      • The escalation means the utility is removing 2,000 megawatts of demand from the grid but Eskom will continue to operate on a thin margin.
        • The utility is appealing to the public, to help conserve electricity.
      • Eskom is set to hold a media briefing on Sunday at 10am, to update the public on the way forward.  MONEYWEB
  • President Cyril Ramaphosa on Friday agreed to cooperate closely with US President Joe Biden on health, security and climate.
    • but warned against punishing African nations for maintaining ties with Russia.
    • The Biden administration has put a new focus on Africa after being taken aback by the reluctance of some nations to condemn Russia over its invasion of Ukraine, which has triggered sweeping Western sanctions.
    • Ramaphosa enjoyed unusually warm treatment from Biden, who walked him back to his motorcade at the White House.  NEWs24
  • Following an urgent board meeting while Stage 5 load shedding was biting on Saturday 17 September.
    • Eskom will on Monday start to urgently procure additional energy from existing independent power producers.
    • This announcement was made during an emergency media briefing by Eskom group chief executive André de Ruyter on Sunday morning.
    • De Ruyter said he hopes to access about 1 000MW from existing independent power producers like Sasol and Sappi and hopes to have it online within a week or two. Money web

GLOBAL MARKETS

Fed week

  • The market expects that interest rates will  rise as the Fed battles inflation.
    • Currently +75 bps is priced in.
  • Earlier, Fed Vice Chair, Lael Brainard, said higher rates likely to remain there for some time to provide confidence that inflation is moving down towards the central bank’s 2% target.
    • She added that at some point in the tightening cycle, the risks of going too far would become more obvious.
  • Fed fund futures implied investors were pricing in a more than 81% chance of another supersized 75 basis-point interest rate hike in September. source: Federal Reserve
  • US stock futures edged lower on Monday as investors braced for this week’s Federal Reserve policy meeting.
  • It is expected to deliver another jumbo rate hike as it remains committed to bringing down inflation.
  • Last week, the Dow fell 4.13%, the S&P 500 dropped 4.77% and the Nasdaq Composite sank 5.48%.
    • All three benchmarks posting their 4th losing week in 5 and tumbling to their lowest levels in two months.
  • Markets remain under pressure ahead of a much anticipated FED decision on Wednesday. CNBC

Bonds:

  • The US 10YT yield rose above 3.46% and fast approaching the over 10-year peak of 3.5% hit in June.
    • The rise on the back of rising concerns that inflation is becoming entrenched,
      • Resulting in deepened expectations that the Federal Reserve will further accelerate the pace of its monetary tightening. 
  • After last week’s CPI report surprised to the upside, the latest data showed that retail sales unexpectedly pick up and weekly unemployment claims fell to their lowest since May.
    • Although markets priced in 75 bps, there continue to be open bets that the Fed could raise interest rates by 100bps on Wednesday.  Bloomberg

FRIDAY

  • The Dow FELL 139 TO 30,822
  • The SP500 DECLINED 28 TO 3,873
  • The Nasdaq  FELL 103 TO 11,448

OVERNIGHT HEADLINES

  • Asian markets all following Wall Street lower ahead of this week’s FED FOMC meeting.
    • In Japan, the Nikkei 225 dropped 1.11% to close at 27,568, hitting its lowest levels in a week and taking cues from a weak overnight session on Wall Street.
      • Investors nervous about high inflation, rising interest rates and slowing growth globally.
      • Economic worries highlighted after FedEx CEO Raj Subramaniam said on Thursday that he believes the global economy was headed for a recession.
      • He cited declining global shipment volumes as “macroeconomic trends significantly worsened.”
    • In Australia, the  ASX 200 eased 0.15% to close at 6,729. The index extending losses from last week as investors remained cautious ahead of central bank decisions this week.
      • Tech stocks led the decline, with sharp losses from Computershare (-4%), while Energy firms also slumped on subdued oil and coal prices
      • Traders expecting an aggressive move from the US Federal Reserve to combat inflation.
         
  • Crude Oil futures fell to $84.5/ bl on Monday, extending three weeks of declines.
    • Oil traders citing aggressive monetary tightening and recession fears. This coupled with fears on the demand outlook ahead of the EU embargo on Russian oil in December.
      • Investors are preparing for a raft of interest rate decisions this week, led by the US Federal Reserve which is expected to deliver another supersized rate hike to combat inflation. 
    • Earlier,
      • The German government announced it had taken temporary control of two subsidiaries of the Russian energy giant Rosneft.
        • The move by the government puts it in charge of Rosneft’s stakes in three refineries in the country.
        • This includes a key facility in the northeast of the country which supplies around 90% of Berlin’s fuel, and in which Rosneft held a majority stake.  Reuters
           
  • Gold prices weakened below $1,670/oz and in turn extending last week’s sharp decline as investors geared up for a raft of interest rate decisions by major central banks this week.
    • The FED is expected to deliver another jumbo rate hike to tame surging inflation.
    • Higher-than-expected inflation numbers and solid economic data in the US last week cemented expectations that the Fed will tighten further.
    • Markets are currently priced for a third straight 75 basis point increase.
    • Gold lost its shine as a store of value in times of economic uncertainties as the US’ relative economic strength and the Fed’s aggressive stance against inflation lifted the dollar at the expense of other safe-haven assets. KITCO  metals
  • The US Dollar

    • The US dollar traded above 110 to 110.10 as investors remained on the side-lines ahead of a big week for central bank decisions.
    • Decision headlined by the Federal Reserve which is expected to deliver another supersized rate hike to tame surging inflation.
      • Higher-than-expected inflation numbers and solid economic data in the US last week cemented expectations that the Fed will tighten further, and markets are currently priced for a third straight 75 basis point increase.
      • The US economy also showed relative strength in the face of slowing global growth, making the dollar attractive for investors looking for safety.
    • Meanwhile, investors remained cautious as other major central banks such as the Swiss National Bank and the Bank of England are also expected to raise interest rates this week.
    • NB: Hawkish surprise could spur more currency volatility. FX NEWS

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