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Morning NOTE

26 April 2023

GOOD MORNING

The ZAR weakened on the back of risk off sentiment following renewed concerns about the banking crises in the USA.

SUMMARY

The Rand dropped to 18.4000 in later afternoon trading on Thursday  on the back of a sell-off in Risk assets following more concerns about regional banks in America.

  • First republic continues to drive the narrative after deposits dropped to $100bn.
    • News that Depositors pulled about $102 billion out of First Republic Bank in the first three months of 2023,
    • The numbers, detailed in an earnings report released Monday, added fresh insight into the turmoil the financial industry experienced in March.
  • Coupled with weak earnings reports, saw the global stock markets decline with the benchmark Dow (-1.0%) and the SP500(-1.5%).
     
  • Depositors continue to withdraw funds from regional banks exiting Risk assets and moving towards safe-haven US money market funds.
    • The Dollar the primary beneficiary in this case.
    • Stocks, EMFX ( like the ZAR) all lower vs the Dollar.
  • This morning we awaiting the SA PPI (11h30) report that could give markets insight into the next SARB move.
    • In addition, another look into the health of the economy will be headlined by the release of the US durable goods report at 14h30.

The ZAR opening off its lows at 18.3000 vs 18.4000 (on Tuesday). 

  • Traders however remain nervous with the raft of data and of course Fed rhetoric.
  • The banking crises remains the pivotal risk.

Data This week
WEDNESDAY

  • 11H30  SA INFLATION  PPI  YOY 12.8% EXPECTED VS 12.2% EXPECTED
  • 14H30 US DURABLE GOODS +0.8% EXPECTED VS -1% PREVIOUS

THURSDAY

  • 14H30 US GDP 2% EXPECTED VS 2.6% PREVIOUS QoQ
  • 14H30 US WEEKLY JOBLESS CLAIMS 250K  VS 245K PREVIOUS

FRIDAY

  • 11H00 EU GROWTH RATE  1.4% YOY EXEPCTED VS  1.8% PREVIOUS
  • 14H00  SA BALANCE OF TRADE R-22BN EXPECTED VS +R16BN PREVIOUS
  • 14H30  US CORE PCE 4.5% EXPECTED YOY VS 4.5% PREVIOUS
  • 15H45   US CHICAGO PMI  43.5 VS 43.8 PREVIOUS

Market Movement Today:

  • The Rand recovered in early trading as traders book some profits ahead of the European open and SA holiday.
     
  • The local unit recovering nearly 10 cents at the open. (18.4000 to 18.3000)
    • Markets remain nervous following news that FRB continues to bleed deposits.
    • The flow into safe haven US treasuries  once again favouring the safety of the Dollar at the expense of risk assets.
       
  • The ZAR once again at the mercy of international capital flows and changes in risk sentiment will likely drive ZAR price action.
     
  • Longer term we remain committed to the view that US inflation have peaked , and this will result in pause before decline of US interest rates.
     
  • This will be ZAR supportive and we continue to expect a stronger ZAR in H2.
     
  • Risk to the above conclusion : would be a return of bank failures, as this would increase the demand for Dollars and send the ZAR lower.
     
  • Trade : TRADE BUY USDZAR ON DIPS.

Expected Ranges:

  • USDZAR : Expect a range 18.1900-18.4000
    • Importers : 18.2600-18.1900
    • Exporters : 18.3300-18.4000
       
  • EURZAR : Expect a range of 20.0100-20.1900
    • Importers : 20.0700-20.0100
    • Exporters : 20.1300-20.1900
       
  • GBPZAR : Expect a range of 22.6100-22.8500
    • Importers : 22.6900-22.6100
    • Exporters : 22.7700-22.8500

OPENING RATES

  • USDZAR : 18.3000
  • EURZAR : 20.1200
  • GBPZAR : 22.7400

SOUTH AFRICA

ICC

  • The Presidency has now clarified that South Africa remains a signatory to the Rome Statute.
    • In a statement, it said that this followed an error in a comment made during an ANC media briefing on Tuesday regarding the International Criminal Court (ICC).
      • It said that regrettably, the president made an error.
      • To set the record straight, the Presidency said that South Africa remained a signatory to the ICC in line with a resolution of the 55th national conference of the ANC held last December.
      • The Presidency said that the December resolution was reaffirmed at a meeting of the ANC’s national executive committee (NEC) meeting at the weekend. EWN
         
    • The South African Institute of International Affairs (SAIIA) said that it takes a year for a country that wants to leave the ICC to officially be removed as a state party.

ESKOM & STRIKES

  • Electricity Minister Kgosientsho Ramokgopa says it’s not his ministry’s role to engage in wage talks between Eskom and its employees, as that is handled by the utility’s executive.
  • Ramokgopa was addressing the media on Saturday at the African National Congress’ (ANC) National Executive Committee meeting in Boksburg.
  • While Ramokgopa said his ministry was not involved in the negotiations, he acknowledged that any disruptions could exacerbate the power crisis.

LOAD SHEDDING DOWNGRADED TO STAGE 3

  • Power cuts would remain at stage 3 during the day and escalate to stage 4 in the evenings until a new notice is issued.
  • South Africans were given a reprieve from higher stages of load shedding on Sunday morning.
  • After more than a week of power cuts seesawing between stages 5 and 6, stage 3 came into effect at 5am.

GLOBAL MARKETS

  • On Tuesday, the Dow fell 1.02%, the S&P 500 tumbled 1.58% and the Nasdaq Composite plunged 1.98%, with all 11 S&P sectors finishing lower.
    • First Republic sank 49.4% after the regional bank revealed that deposits shrank by 41% to $104.5 billion last quarter, reigniting concerns about a wider impact from the banking crisis.
    • Investors now look ahead to more corporate earnings reports and a slew of economic data on Wednesday for more clues on the state of the economy.
       
  • US stock futures rose on Wednesday as stronger-than-expected earnings results from mega-cap tech names lifted market sentiment.
    • Nasdaq 100 futures jumped more than 1%, while S&P 500 and Dow futures gained 0.4% and 0.2%, respectively.
       
  • In extended trading, Microsoft surged more than 8% after beating estimates for the top and bottom lines in the latest quarter,
    • while Google-parent Alphabet climbed 2% on better-than-expected revenue.

Bonds

  • The 10-year US yield, seen as a proxy for borrowing costs worldwide, eased to around 3.4%.
  • Traders citing continuation of  money flowing into safe-haven government debt amid lingering concerns about Fed-induced recession late in 2023.
     
  • Still-high inflation and a slew of hawkish speeches from policymakers prompted bets for another 25bps increase in the Fed funds rate next month.
    • Investors now focus on critical economic data, including the US GDP on Thursday and the PCE price index on Friday, for further insight into the central bank’s future policy.
    • Meanwhile, money markets continue to see interest rates peaking in the coming weeks before a series of cuts later this year.

Yesterday

  • DOW fell 344  to 33,530
  • SP500 fell 65 to 4,071
  • NASDAQ  fell 238 to 11,799

  image: Trading economics

OVERNIGHT HEADLINES

The US Dollar

  • The US  dollar strengthened sharply against a basket of major currencies on the back of renewed banking crises fears.
    • The news pushing the DXY towards the 102 mark on the back of a flight to safety as concerns about the banking system resurfaced following disappointing earnings from First Republic Bank and UBS.
    • On top of that, the Federal Reserve will likely deliver another 25bps rate hike next week as signs of persistent inflation suggest the tightening cycle is not over yet.
    • Still, money markets are now pricing in the peak for US interest rates in June and then a decline to end the year below 4.5%.
    • Investors now look ahead to first-quarter GDP data and April consumer sentiment data for more clues on the state of the economy and more earnings reports from major US firms.
    • This dollar’s strength was seen across the board, with some of the most pronounced buying activity against risk-sensitive currencies such as the Australian dollar. Fx news

Asian markets

Markets tracking Wallstreet with regional stock markets all tracking lower, following the fears of a wider banking crises.

  • In Japan, the Nikkei 225 fell 0.71% to close at 28,416, snapping a two-day advance and taking cues from a negative lead on Wall Street.
    • Traders citing disappointing news from First Republic Bank reignited fears about a wider impact from the banking crisis.
    • Investors also look ahead to the Bank of Japan’s monetary policy meeting this week, the first to be led by new central bank chief Kazuo Ueda.
    • Financial stocks led the decline, with losses from Mitsubishi UFJ (-1.9%), Sumitomo Mitsui (-2.2%) and Mizuho Financial (-2.4%).
       
  • In Australia , the ASX 200 inched down 0.08% to close at 7,316, hitting its lowest levels in two weeks.
    • Traders citing investors reacted to data showing the annual inflation rate in Australia eased from a three-decade high in the first quarter.
    • The prospect of a recession in the US and an underwhelming economic recovery in China also weighed on export-heavy Australian commodity firms.
    • Iron ore miners led the decline, with losses from BHP Group (-0.4%), Fortescue Metals (-0.5%) and Rio Tinto (-1.1%).
    • Mineral Resources also plunged9.7% after the mining services company downgraded its full-year production guidance.
    • Meanwhile, gold stocks advanced on safe-haven bets, with sector leaders Newcrest Mining and Northern Star Resources gaining 1.7% and 1.5%, respectively. Reuters

Crude Oil

  • US WTI crude oil rose toward $78 /BL on Wednesday after an industry report showed that US crude inventories dropped by more than 6 million barrels last week.
    • The drop exceeding expectations for a 1.7 million barrel decline.
    • Still, the US oil benchmark remains down about 7% from its April high amid concerns about slowing global economic growth and tightening financial conditions that could hurt energy demand.
    • Investors now look ahead to a raft of US economic data to gauge the health of the world’s largest oil consumer. Gulf Energy news

Gold

  • Gold traded near $2,000 /oz on Wednesday, holding its recent advance as renewed concerns about the financial sector and global economic uncertainties lifted demand for the safe-haven asset.
    • First Republic shares sank 49.4% on Tuesday after the US-based regional bank revealed that deposits shrank by 41% to $104.5 billion last quarter, reigniting concerns about a wider impact from the banking crisis.
    • Concerns that the US Treasury Department could hit its debt limits in the coming months also prompted investors to avoid certain Treasury bills and pour into other assets.
    • Elsewhere, latest data showed that US consumer confidence tumbled to a nine-month low in April, adding to a batch of weak data suggesting the economy could be headed for a recession this year.
    • Investors now await more US data this week for more clues about the state of the economy, including the core PCE index and GDP figures. Kitco metals report

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