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Morning NOTE

23 May 2023

GOOD MORNING

The ZAR recovered on the back of profit taking ahead of Wednesday Fed minutes and Thursday’s  SARB MPC.

SUMMARY

The ZAR gained more than 30 cents or 1.70% to trade below 19.2000 as traders booked profits ahead of the “high” event risk moments.

  • The local unit gaining even though the Dollar remained well bid against the rest of the G7 and EM complex.
     
  • Stalling the ZAR advance was a another spike in US yields as markets await the Fed minutes.
    • The US 10YT at 3.72%
    • Markets continue flip between “no hike or +25bps “at the June FOMC  meeting.
  • And
    • The uncertainty making Wednesday’s FOMC MINUTES even more important as traders look for clues on future rates.
      • On Friday, Fed chair Jerome Powell broke rank from other Fed Governors, when he stated that a pause might be the right thing to do given the Regional Banking turmoil,
        • This after numerous governors insisted on the need for more hikes to reduce inflation.
        • Noted hawk Bullard once again not passing the opportunity to speak on rate policy, even called for another 50 bps increase in 2023.
        • Whereas the Fed’s Kashkari, described the decision to pause in June as “ a close call”.
  • In addition, we await Thursday’s key SARB MPC RATES DECISION.
    • Recall, the SARB raised its benchmark repo rate by 50 bps to 7.75% at its March 2023 meeting, while markets had expected a smaller 25 bps increase.
    • It was the 9th consecutive rate hike since policy normalization started in November 2021, bringing borrowing costs to the highest since May 2009.
  • We also have SA CPI/inflation data due tomorrow at 10h00 with 7% expected (7.1% previous), but still above the 3-6% band.
    • FRA markets are pricing in a 50 bps hike by the SARB although economists are calling for 25 bps/

Markets this morning

  • USDZAR 19.2300
  • DOLLAR 103.27
  • EURUSD 1.0810
  • SP500 4,198
  • GOLD  1960
  • US10YT 3.72%

Data This week
Tuesday

  • 15h45 : US PMI  EXPECTED 52.6  PREVIOUS  53.6 

WEDNESDAY

  • 08H00 : UK INFLATION  8.3% EPXECTED VS 10.1% PREVIOUS  YOY
  • 10H00 : SA INLFLATION  YOY 7% VS 7.1% PREVIOUS
  • 10H00 : SA CORE INLFLATION  YOY 5.3% VS 5.2% PREVIOUS
  • 20H00 : US FOMC MINUTES

THURSDAY

  • 11H30 : SA PPI 9.5% EXPECTED VS 10.6% PREVIOUS
  • 14H30 : US GDP GROWTH  Q2  1.1% EXPECTED VS 2.6% PREVIOUS
  • 14H30 : US PCE  4.2% EXPECTED VS 3.7%
  • 15H00 : SARB MPC RATES DECISION  +25 BPS (EXPECTED ECONOMISTS) FRA’S PRICING +50BPS  – PREVIOUS 7.75% 

Market Movement Today:

The ZAR opened stronger this morning and continues to trade around the 19.2000 level.

  • The local unit awaiting key international and local data.
  • In addition notable event risk items include
    • Wednesday FED minutes
      • SA INFLATION
    • Thursday SARB MPC
      • US GDP
         
  • All of the above are market movers, currently the ZAR remains under pressure against a resurgent Dollar.
    • Although markets are pricing for ZERO rate hikes in June, there are constant chatter of rate hikes by various Fed governors.
    • Treasury yields continue to rise with the US10YT at 3.72% at the time of writing.
    • Rising yields remain a negative for the ZAR.
       
  • Locally on Thursday, the SARB is expected to hike 25 bps although the FRA (professional rates market) are braced for 50 bps.
    • NB: 50 would be ZAR supportive.

Markets

  • USDZAR 19.2300
  • DOLLAR 103.27
  • EURUSD 1.0810
  • SP500 4,198
  • GOLD  1960
  • US10YT 3.72%
     
  • Trade this session BUY USDZAR ON DIPS (UNTIL FED MINUTES)

Expected Ranges:

  • USDZAR : Expect a range 19.0400-19.4000
    • Importers : 19.1600-19.0400
    • Exporters : 19.2800-19.4000
       
  • EURZAR : Expect a range of 20.7000-20.8800
    • Importers : 20.7600-20.7000
    • Exporters : 20.8200-20.8800
       
  • GBPZAR : Expect a range of 23.8100-24.0200
    • Importers : 23.8800-23.8100
    • Exporters : 23.9500-24.0200

OPENING RATES

  • USDZAR 19.2600
  • EURZAR 20.8000
  • GBPZAR 23.9000

SOUTH AFRICA

STAGE 1

  • Eskom eased load shedding to stage 1 on Sunday morning.
  • Stage 1 kicked in at 5am and is expected to last until 4pm on Sunday afternoon, after which Stage 4 will kick in.
  • Eskom said the lower stages are a result of lower demand, warning, however, that it’s still experiencing capacity constraints during peak hours.

Eskom is asking consumers to delay starting up inverter and battery systems when electricity returns after load shedding to avoid a demand peak after every planned blackout.

  • Such peaks can destabilise the system and result in trips. Moneyweb

Cholera outbreak

  • The Gauteng Department of Health’s spokesperson said as of Sunday night,
    • 37 people were admitted to a hospital in the area and the hospital thus far saw 95 coming to seek medical attention since 15 May.
       
  • The cholera death toll in Hammanskraal has risen to 12.
    • This is confirmation from the Gauteng Department of Health on Monday.
    • “As of last night, we have 37 people that have been admitted in hospital,
    • and also we had 95 people that the hospital had seen who had come to seek medical attention since 15 May,” said spokesperson Motalatale Modiba.
    • Residents in the region said they always knew the tap water in the area is not safe for consumption.
    • On Sunday, the Tshwane municipality released a health warning, urging residents not to drink water from the taps as it is not safe. EWN

GLOBAL MARKETS

Stocks

  • In regular trading on Monday, the Dow fell 0.42%, while the S&P 500 and Nasdaq Composite rose 0.02% and 0.5%, respectively.
    • Technology, real estate and financials outperformed the market, while consumer staples, materials and energy declined the most.
    • Those moves came as investors followed the latest updates On the policy front,
    • Fed’s Kashkari said a June rate pause or hike is a close call and St. Louis Fed President Bullard said the Fed may still need to raise rates by another half-point this year.
       
  • This morning, US stock futures climbed on Tuesday as President Joe Biden and House Speaker Kevin McCarthy signalled cautious optimism.
    • Both parties agree that a deal to raise the debt ceiling would be reached following their meeting late on Monday.
  • Futures contracts tied to the three major indexes were all up nearly 0.3%. CNBC

Bonds

  • The yield on the US 10-year Treasury note rose to 3.72%, the highest since mid-March, as investors follow the debt ceiling impasse and the monetary policy outlook.
  • President Biden and House Speaker Kevin McCarthy expressed optimism after a meeting on Monday,
    • although a deal on the government debt has not been reached yet and negotiations are set to continue during the week.
  • On the monetary policy front, traders will continue to follow any comments from Fed officials on the Fed’s next steps.
  • Market participants are currently assigning an 80% probability that the Fed will maintain the rates steady in June.
  • Traders also awaiting the FED minutes on Wednesday. Reuters

Yesterday

  • DOW -140 : to 33,286
  • SP500 : 4,192
  • NASDAQ : +62 to 12,720

  image: Trading economics

OVERNIGHT HEADLINES

The US dollar

  • The US dollar index steadied around 103.3 on Tuesday.
    • The Buck supported by growing expectations that the Federal Reserve will keep interest rates higher for longer.  
    •  In the latest central bank commentary, Fed’s Bullard suggested the possibility of raising rates by another half-point this year,
    • while Fed’s Kashkari described the decision to pause or hike rates in June as a close call.
    • Markets have scaled back bets on interest rate cuts this year, with rates seen holding at around 4.7% by December. FX NEWS

Asian markets lower as traders book profits ahead of key US data this week.

  • In Japan, the Nikkei 225 Index fell 0.42% to close at 30,958, as investors took some profits off the table following a strong rally that brought the benchmark indexes to their highest levels since 1990.
    • Investors also cautiously awaited updates from the US debt ceiling negotiation and Fed minutes on Wednesday.
    • Meanwhile, data showed that Japan’s manufacturing sector returned to growth in May for the first time since October, while services activity notched a record high.
       
  • In Australia, the ASX 200 Index shed 0.05% to close at 7,260 on Tuesday, ahead of the Fed minutes on Wednesday.
    • Investors also digested data showing Australian manufacturing activity remained contractionary in May, while services activity slowed.
    • Notable losses were seen from index heavyweights such as BHP Group. REUTERS

Crude oil

  • US WTI crude futures strengthened above $72/BL on Tuesday, extending gains from the previous session amid an improving demand outlook and declining global supplies.
    • The IEA  projected that global oil demand will exceed supply by 2 million barrels per day in the second half of 2023, according to its latest monthly report.
      • A senior executive at Vitol indicated a similar forecast, while adding that Asia will drive most of the demand growth.
      • On the supply side, crude flows from Canada have fallen in recent weeks after wildfires shut in large amounts of supply in Alberta.
      • Oil exports from OPEC+ countries which include Russia have also declined as planned production cuts took effect this month. GULF ENERGY NEWS

Gold

  • Bullion weakened toward $1,960 /oz on the back of rising treasury yields.
    • The Yellow metal extending losses from the previous session, weighed down by a stronger dollar, amid hawkish remarks from Federal Reserve officials.
    • President Joe Biden and House Speaker Kevin McCarthy signalled cautious optimism that a deal to raise the debt ceiling would be reached.
    • On the monetary policy front, Fed’s Bullard suggested the possibility of raising rates by another half-point this year,
      • while Fed’s Kashkari described the decision to pause or hike rates in June as a close call.
    • Markets have scaled back bets on US interest rate cuts this year, with rates seen holding at around 4.7% by December. KITCO METALS REPORT

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