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Morning NOTE

2 August 2023

GOOD MORNING

The ZAR retreated on the back of a rebound in the Dollar ahead of key data this week.

Market Movement Today:

The ZAR  weakness continued on the back of a Risk-off  Dollar rally.

  • The Rand crashed through the R18/$ support handle to reach R18.37/$ in early trading.
  • Risk assets lower across the board, following FITCH  ratings agency’s downgrade of the USA.
    • The rating agency cited  “the expected fiscal deterioration over the next three years,”
      • a high and growing general government debt burden,
      • and the erosion of governance” relative to peers.
    • Fitch cutting the USA debt ratings from AAA to AA+. 
       
  • Stocks sharply lower with the SP500 lower and the Japanese Nikkei lower -2.58%.
    • Investors booking profits, ahead of today’s ADP jobs report as well as Yield spike above 4%.
    • The environment is remarkably different from a week ago as investors once again opted for the Dollar.
    • We expect the ZAR weakness to continue on the back of a resurgent (safe-haven) Dollar, but advise caution ahead of Friday’s NFP report.
       
  • The BOE is also expected to hike by 25bps tomorrow also likely to pressure risk assets.
     
  • Technically, USDZAR is at its 50% retracement level, and a break likely to target 61.8% at 18.5000
  • Trade:  BUY USDZAR on DIPS

Data This week

Wednesday 

  • ***14H15  US ADP EMPLOYMENT CHANGE 188K  EXPECTED VS 497K  PREVIOUS 

Thursday

  •  9H15  SA S&P GLOBAL PMI 49 CONSENSUS VS 48.7 PREVIOUS
  • 11H0 EU PPI  YOY -3.1%  VS -1.5% PREVIOUS

 

  • 13H00  UK  BANK OF ENGLAND RATE DECISION  +25BPS  FROM 5% TO 5.25%.
  • 13H00  US BOE MPC MEETING MINUTES

 

  • 14H30 US WEEKLY JOBLESS CLAIMS EXPECTED 227K VS 221K PREVIOUS
  • 16H00  US SERVICES PMI 53 EXPECTED VS 53.9 PREVIOUS

Friday

  • 14H30  US NON FARM PAYROLLS  200K EXPECTED VS 209K PREVIOUS
  • 14H30  US UNEMPLOYMENT RATE 3.6%  EXPECTED UNCHANGED

Market Highlights:

  • The Rand lost more ground against a recovering Dollar.
    • The local unit trading above R18.30/$ on the back of Dollar demand.
    • Traders are wary of the upcoming Jobs data with ADP in the crosshairs later today.
    • Markets are pricing for a 189k increase in private payrolls and anything higher is likely to send the Dollar higher.
  • Rising Dollar yields are also supportive of the US dollar with the benchmark 10YT at 4.03%.
  • Risk sentiment was also largely on the back foot on Wednesday
  • News broke that ratings agency Fitch downgraded the US’s credit rating from AAA to AA+.
    • The rating agency cited  “the expected fiscal deterioration over the next three years,
      • a high and growing general government debt burden,
      • and the erosion of governance” relative to peers.
  • Long ZAR positions under pressure and stops triggered above R18/$ sending the Dollar higher.
    • We expect more of the same but caution advised ahead of the ADP (private payrolls) at 14h15

Markets this morning:

  • USDZAR 17.9300
  • DOLLAR 102.00
  • EURUSD 1.0990
  • SP500 4,598
  • GOLD  1959
  • US10YT 3.97%

SOUTH AFRICA

Coal

  • Global demand for coal is bringing mayhem to SA towns.
    • Miners have no choice but to use trucks to cash in on record demand.
    • SA became one of Europe’s main alternatives to Russian coal following Moscow’s invasion of Ukraine in February 2022.
    • Suppliers are finding new buyers in India and China.
    •  It’s not possible to swap roads for rail because Transnet’s Freight Rail is crumbling.
    • Miners have no choice but to use trucks to cash in on record demand. Source Moneyweb

SA-US relations

  • Minister of Trade and Industry Ebrahim Patel admitted that the United States (US) did question South Africa’s relations with Russia.
    • The discussions amid the ongoing war in Ukraine, while discussing a possible extension of the African Growth and Opportunity Act (AGOA).
    • Earlier in July, Patel, alongside Minister of Finance Enoch Godongwana, visited Washington to discuss the state of trade agreements between the two countries.
    • South Africa asked the US to consider an early extension of AGOA, set to expire in 2025.
    • Patel said South Africa cannot afford to lose out on AGOA’s benefits.
      • “The United States is our second largest country trading partner. At a country level, it follows China, which is our biggest trading partner.
      • We sell about $15 billion worth of products to the United States.”
    • South Africa faces losing the benefits of the trade programme as a result of its alleged relationship with Russia and its “fence-sitting” on Russia’s invasion of Ukraine. Source Moneyweb

GLOBAL MARKETS

Stocks

  • Stocks lower after US debt Downgrade

    • US stock futures fell on Wednesday after Fitch downgraded the US’s credit rating from AAA to AA+.
    • The ratings agency citing  “the expected fiscal deterioration over the next three years, a high and growing general government debt burden, and the erosion of governance” relative to peers.
       
    • On Tuesday, the Dow gained 0.2%, while the S&P 500 and Nasdaq Composite dropped 0.27% and 0.43%, respectively.
      • Those moves came as investors reacted to mixed corporate earnings results, though about 82% of S&P 500 companies that have reported earnings so far posted positive surprise, according to FactSet.
      •  
      • Futures contracts tied to the three major indexes were all down at least 0.2%.

Bonds

  • Yields rebound on back of resilient US economy.

    • The yield on the US 10-year Treasury rose above the 4% mark.
    • The benchmark approaching levels last seen in November 2022 and adding 20bps since the start of the third quarter.
       
  • Traders citing evidence of a resilient economy strengthened the case for the Federal Reserve to remain hawkish.
    •  
    • The US GDP expanded by 2.4% in the second quarter, surpassing market expectations of a 1.8% increase.
    • Additionally, jobless claims declined to multi-month lows in the end of July and the JOLTS pointed to another period of solid job offers.
    • Key data this week will confirm the trend of tightness in the labour market.
    • The results underscored the economy’s strength despite the Fed’s aggressive tightening campaign.
    • All of this backing bets that the central bank may deliver another rate hike this year.

Market Close:

  • DOW +71 to 35,630
  • SP500 -12 to 4,576
  • NASDAQ -62 to 14,238

OVERNIGHT HEADLINES

  image: Trading economics
 

Asian markets

  • Asian equity markets lower after US debt downgrade.
    • Fitch downgraded the US’s credit rating from AAA to AA+.
  • In Japan, the Nikkei 225  dropped 1.1% to around 33,100, breaking a two-day rally.
    • Markets  weighed down by weak global sentiment after Fitch downgraded the US’s credit rating due to fiscal and governance-related uncertainties.
    • Investors also continued to track the yen and JGB yields after the Bank of Japan made adjustments to its yield curve control policy at last week’s meeting.
    • Technology stocks led the decline, with notable losses from Advantest (-3.2%), Tokyo Electron (-2.4%), SoftBank Group (-1.2%). Source Reuters

Energy

Oil prices higher US inventory drop.   

  • US WTI crude futures jumped more than 1% to above $82 per barrel on Wednesday, hitting the highest levels in over three months.
  • An industry report showed that US crude inventories declined by 15.4 million barrels last week.
  • The latest figure far exceeded market expectations for a 1.37 million barrel draw,
    • and if confirmed by official data due later on Wednesday, it would mark the largest drop in US crude inventories in over four decades.
  • Oil prices have also been rallying since late June as Saudi Arabia’s voluntary output cuts tightened global supply.
  • The de facto OPEC leader is also expected to announce an extension of its 1 million barrels per day production cut through September at the group’s meeting on Friday.
  • Meanwhile, the USA pulled an offer to buy 6 million barrels of oil for the US Strategic Petroleum Reserves to counter rising energy prices. Source Gulf news

Metals

Precious metals losing ground after US yields spike.

  • Gold fell to around $1,946/oz on Tuesday, struggling to gain momentum as investors awaited more data to guide the economic and monetary policy outlook.
  • The Fitch downgrade of the USA to AA+ from AAA , so far being ignored by traders.
  • US 10Y’s back above 4% and supporting the recent Dollar at the expense of precious metals.
  • Investors now look ahead to the key US monthly jobs report later in the week.
  • Meanwhile, the Reserve Bank of Australia kept its policy rate unchanged at 4.1% during its August meeting, defying market expectations for a 25 basis point rate hike. Source Kitco

Currencies

Dollar higher on the back of higher US yields

  • The dollar index appreciated to 102.3 on the first day of August.
  • The Greenback, trading at high levels not seen in nearly a month, as risk appetite declined.
  • Investors also digesting fresh economic data and the monetary policy outlook.
  • The ISM manufacturing PMI for the US pointed to a ninth-straight month of contraction in the factory sector .
  • The payrolls report due Friday is set to provide further clues on the labour market strength. Source :  Forexnews

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