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Morning NOTE

28 November 2022

GOOD MORNING

The ZAR weakened on the back of Risk off sentiment following unrest in China.

SUMMARY

  • The Rand continued to give up gains in early trading due to unrest in China on the back of Covid-19 protests.
    • Traders also citing weak shorts in particular are getting stopped out on the back of a Dollar recovery.
    • The leading story however, this Monday are widespread protests in China against Covid-19 lockdowns.
    • Analysts however warning that Beijing may not make any major changes to the policy anytime soon as outbreaks continue to rise.
       
  • The US 10YT lower to 3.64% on the back of safe-haven buying as the Dollar index recovered to 106.22.
     
  • Chinese citizens all protesting with mainland stocks down as protests against China’s strict Covid restrictions spread across cities.
    • Risk-off sentiment weighing on the outlook for the world’s second-largest economy.
    • Even though Goldman Sachs said China may end its zero-Covid policy earlier than anticipated, fears continue of a government crackdown to end protests and it affected markets.
       
  • Medium term the ZAR remains on a “bid” bias after the latest FED  meeting minutes showed that policymakers agreed it would soon be appropriate to slow the pace of interest rate hikes.
    • Earlier, the Fed delivered its fourth straight 75 basis point rate increase and pushed borrowing costs to the highest since 2008 to tame stubbornly high inflation.
    • Market are now betting that it would moderate the size of its rate hike in December to 50 basis points.  

All of this pointing to a stronger ZAR in Q1 of 2023.

Significant Market Data:

TUESDAY

  • 08h00 : SA MONEY SUPPLY M3 8.75% PREVIOUS (NO ESTIMATES)
  • 11H30 : SA UNEMPLOYMENT RATE Q3 34.3% EXPECTED VS 33.9% PREVIOUS
  • 15H00 : GERMAN INFLATION 10.3% EXPECTED VS 10.4% EXECPTED.

 
WEDNESDAY

  • 14H00 : SA BALANCE OF TRADE R+24BN VS R19.7 BN PREVIOUS
  • 15H30 : US GDP GROWTH +2.7% EXPECTED VS -0.6% PREVIOUS, ESTIMATE Q3
  • 20H00 : US FED CHAIR JEROME POWELL SPEAKS

 
THURSDAY

  • 15H30 : US PCE INDEX 5.9% CONSENSUS VS 6.2% PREVIOUS
  • 17H00 : US PMI MANUFACTURING  49.8 EXPECTED VS 50.4 PREVIOUS

 
FRIDAY

  • 15h30 : US NON-FARM PAYROLLS +200K EXPECTED VS +261K PREVIOUS
  • 15h30 : US UNEMPLOYMENT RATE 3.7% EXEPCTED VS 3.7% PREVIOUS

Today:

  • The ZAR on the back foot in Asian early trading following large protests in China.
    • Chinese citizens protesting against the government’s zero covid-policy and lockdowns as cases once again jumps.
      • Unlike the West, China remains under lockdown protocols
    • Markets trading risk off as the world’s 2nd largest economy continues to affect global supply chains as well as Demand for commodities.
    • The US dollar recovering from its losses to trade above 106 index, and bond yields falling on safe haven buying.
       
  • NB: the Dollar gains likely to be temporary as the underlying driver remains the FED.
    • A slow down in rate hikes, with a pause in 2023, likely to increase demand for risk assets at the expense of the US dollar.
    • This will be ZAR supportive and we see that in Q1 of 2023.
       
    • Later this week we once again have inflation data out of Europe with Germany expected to report double digits of 10.4% .
    • Higher than expected will probably result in more Risk off sentiment 
       
    • BUT the main data point will once again be Friday’s US NON FARM PAYROLLS , with 200k expected.
       
  • Today, however, with US liquidity returning to markets after the Thanksgiving “long” weekend,
  • AND the risk off sentiment in Asia expect some ZAR weakness.

    Trade :  BUY USDZAR ON DIPS.

Expected Ranges

  • USDZAR :  Expect a range 17.0300-17.2700
    • Importers 17.1100-17.0300
    • Exporters 17.1900-17.2700
       
  • EURZAR :  Expect a range of 17.6200-17.9200
    • Importers 17.7200-17.6200
    • Exporters 17.8200-17.9200
       
  • GBPZAR :  Expect a range of 20.5100-20.8100
    • Importers 20.6100-20.5100
    • Exporters 20.7100-20.8100

OPENING RATES

  • USDZAR 17.1500
  • EURZAR 17.7700
  • GBPZAR 20.6800

SOUTH AFRICA

STRIKES

  • Public service unions look poised to engage in a third strike day this week as the government continues to refuse to meet their wage increase demands.
  • The threats of renewed strike action follow a march to the offices of the National Treasury in Pretoria last week.
  • UNIONS  rejecting the 7.5% wage offer. 

Eskom

  •  Eskom announced the suspension of load shedding from midnight on Sunday with stage 1 power cuts expected to be implemented between 5 AM and 4 PM on Monday.
  • In a statement, the utility said the suspension would be followed by stage 2 cuts from 4 PM throughout the night. Eskom

ANC ELECTIONS

  • With campaigning continuing ahead of the ANC’s leadership conference,
    • Transport Minister and ANC secretary general hopeful – Fikile Mbalula – has called for unity within the party – before its 55th national elective conference next month.
  • It is now clear that former health minister Mkhize will be challenging Ramaphosa for the leadership position.
    • CR speaking in Lichtenburg in the North West – where he said that government had undertaken steps to professionalise the public sector in a bid to improve service delivery.
    • This after Mkhize started to campaign outside of KZN in his bid to be president.  EWN

 

GLOBAL MARKETS

  • US stock futures fell on Monday, weighed down by weak global sentiment following news of growing unrest in China over Covid restrictions.
     
  • Futures contracts tied to the three major indexes were all trading in negative territory.
     
  • In last week’s holiday-shortened trading, the major averages finished higher AFTER the Federal Reserve signalled that it would likely slow the pace of interest rate hikes.
    • The week saw the Dow jumping 1.78%, the S&P 500 rising 1.53% and the Nasdaq Composite gaining 0.72%.
    • Investors now look ahead to a slew of US economic releases this week such as the Jobs report, personal consumption data and ISM manufacturing figures, among others.  CNBC

Bonds:

  • The yield on the US 10-year, traded below 3.7%, on the back of a Fed pivot as well as safe-haven buying following unrests in China.
    • Minutes from the last Fed meeting showed officials see the case for a slower pace of interest rate rises.
    • This outlook for monetary policy is decoupling from the one seen for Europe,
      • Earlier the ECB reassured markets that its tightening cycle is far over despite the continent heading for a recession in the last quarter of 2022.
  • Germany’s 10-year Bund yield, the European benchmark, rebounded from a two-month low to around 1.9%. Reuters

ON FRIDAY

  • The Dow added 152 to 34,347
    The SP500 fell 1.14 to 4,026
    The Nasdaq fell 59 to 11,226

OVERNIGHT HEADLINES

Asian markets lower on the back of negative sentiment after widespread protests erupted in China against the government’s Zero Covid-19 policy.

  • In Japan The Nikkei 225 fell 0.42% to close at 28,163, extending losses from the previous session as a growing unrest in China over its zero-Covid policy dampened regional sentiment and hurt risk assets.
    • Investors also continued to book profits as expectations that the US Federal Reserve will slow the pace of interest rate hikes drove Japanese stocks to multi-month highs in recent sessions.
    • Commodity-linked stocks led the retreat, with sharp losses from Nippon Steel (-3.6%).
       
  • In China, The Shanghai Composite dropped 1.1% to below 3,070, with mainland stocks hitting multi-week lows as protests against China’s strict Covid restrictions spread across cities.
    • Goldman Sachs said China may end its zero-Covid policy earlier than anticipated with some chance of a “disorderly” exit due to growing discontent, though fears of a government crackdown continued to roil markets.
    • However analysts expect China to continue with its policies as case continue to spike.
       

US Dollar

  • The dollar index edged above 106 on Monday, rising further from recent lows as a growing unrest in China over its strict Covid restrictions dented risk sentiment.
  • The result an increase in haven demand for the currency.
  • Earlier this month, the Fed delivered its fourth straight 75 basis point rate increase and pushed borrowing costs to the highest since 2008 to tame stubbornly high inflation,
    • and markets are now betting that it would moderate the size of its rate hike in December to 50 basis points.
    • Investors also look ahead to a slew of US economic releases this week such as the NFP report, personal consumption data and ISM manufacturing figures, among others. FX news
       

Crude oil

  • US WTI crude futures dropped about 3% to around $74 per barrel on Monday, sinking to the lowest levels since December last year.
    • In addition, the global oil benchmark, Brent crude futures dropped more than 2% below $82 per barrel on Monday.
    • DEMAND CONCERNS : Causing prices to sink to the lowest levels since January as widespread protests in China over its strict zero-Covid policy.
    • Oil prices were also pressured by reports that the US granted Chevron Corp a license to resume oil production in Venezuela.
    • The international oil benchmark has entered its fourth straight week of declines as Covid-related uncertainties in top crude importer China and mounting fears of a global recession gripped energy markets. Gulf energy news

 
Gold

  • Gold slipped to around $1,750 an ounce on Monday as the dollar recovered slightly on haven demand, as widespread protests against strict Covid restrictions in China.
    • Investors are also bracing for the US economic jobs reports to gauge the state of the world’s largest economy.
    • Earlier this month, the Fed delivered its fourth straight 75 basis point rate increase and pushed borrowing costs to the highest since 2008 to tame stubbornly high inflation.
    • Traders  are now betting that it would moderate the size of its rate hike in December to 50 basis points.
    • Gold is highly sensitive to the rates outlook as higher interest rates raise the opportunity cost of holding non-yielding bullion, denting its appeal. Kitco metals

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