Morning NOTE

4 October 2022

GOOD MORNING

The ZAR gained 1.65% on the back of improved global risk sentiment after the UK government scrapped their controversial tax plans.

SUMMARY

The Rand benefitted from improved risk sentiment after the British government scrapped their tax cut plans.
- Markets had revolted against the plans with Bond yields spiking higher, stock markets falling and the British Pound falling to record lows against the Dollar.
  - The turmoil in the markets, that placed UK pension funds at risk, forced the Bank of England, to exact more QE in a time of high inflation.
  - Against this back drop and enormous market pressure, the British government , reluctantly, scrapped the tax cut plans.
All of this resulted in a Risk on scenario as Risk assets rallied strongly on the first day of trading in October.
The ZAR gaining as stock markets recovered with the SP500 trading above 3700.
- The local unit reaching 17.7200 in early European trading.
The US Dollar also lower at 111.50. The Buck falling on the back lower Treasury yields after weaker than expected US PMI data.
- Data indicating that higher interest rates might be having an effect on the economy.
  - Earlier, New York Fed Bank President John Williams said, that while there are signs of inflation cooling, underlying price pressures remain elevated.
- Thus reinforcing the case for further monetary tightening.
- The US10YT at 3.62%
This morning, adding to the Risk on wave, we had the RBA (Reserve Bank of Australia), raising rates by 25 bps.
- It was less than the market expectation of 50 bps.
- The board said that inflation in Australia was too high, as was the case in most countries, and that a further increase in prices is expected over the months ahead.
- The lower than expected increase however, signalling to markets that the RBA thinks that inflation might have peaked.
- This would be risk supportive across the board.
Against this back drop, we expect another positive session for Risk, ahead of Friday’s NFP report and next week’s US CPI.

Significant Market Data

On Monday

16h00 : US PMI 52.2 VS 52.8
- Actual was 50.9
  - *** The ISM Manufacturing PMI unexpectedly fell pointing to the slowest growth in factory activity since the contractions in 2020.

FRIDAY

14H30 : US NON FARM PAYROLLS +250K EXPECTED VS 315K PREVIOUS
14H30 : US UNEMPLOYMENT RATE 3.7%

Today

The ZAR traded stronger on Monday on the back of improved global risk sentiment.
- The unit gained 1.65% to take us to the bottom of the range we’ve been trading in i.e. 17.8000-18.2200.
- With markets recovering from a blood bath in September we could expect more “Risk buyers” to enter this session.
- A break of 17.8000 could target 17.6700 as “Dollar longs would be forced to liquidate”.
  - A spike towards 17.5000 also on the cards ( extreme view).
This morning after a dip below 17.7000 handle at the open,
- we expect a bounce back into the range as market makers induce stops.
- Thereafter,
- In the short term, (ahead of Friday’s data),we expect a stronger ZAR, following the RBA this morning (25bps) and yesterday’s weak US PMI’s
Trade : SELL USDZAR ON RALLIES **

Expected Ranges

USDZAR : Expect a range 17.6700-17.9200
- Importers 17.7300-17.6700
- Exporters 17.8600-17.9200
EURZAR : Expect a range of 17.4100-17.6200
- Importers 17.4900-17.4100
- Exporters 17.5500-17.6200
GBPZAR : Expect a range of 20.000-20.3700
- Importers 20.1100-20.0000
- Exporters 20.2400-20.3700

OPENING RATES

USDZAR 17.8100
EURZAR 17.5200
GBPZAR 20.1800

SOUTH AFRICA

After the sale of SAA to the Takatso consortium, Unsuccessful bidder Toto Investments took the government to court claiming the deal was not fair, equitable or transparent.
- Public Enterprises Minister Pravin Gordhan will have to provide all documents to the Western Cape High Court.
  - The issue related to the sale of a majority stake in national carrier South African Airways (SAA) to Takatso Consortium.
- Toto investments however, failed in its bid to immediately halt the sale transaction from going ahead.
  - The Western Cape High Court gave the Department of Public Enterprises 20 days to submit documents it claimed were confidential to the Judge’s chambers. EWN
The department for Mineral Resources and Energy said that petrol prices will decline for a 3rd month in a row.
- It what will be seen as more good news for motorists.
- 95 octane will decrease by R1.02 while 93 octane will be 93 cents cheaper at midnight on Wednesday.
  - But diesel increases by 10 and 15 cents for the different grades. Source DMRE
Energy regulator Nersa has missed its own “tight deadline” to finalise a new method for determining the tariffs Eskom, municipalities, and all other electricity licensed suppliers may charge.
- A meeting of the energy regulator on Thursday (29 September) noted that it will only be finalised early next year, due to delays in the appointment of technical specialists.
- Eskom has once against applied for an outsized increase in electricity tariffs, citing the high cost of diesel as the reason. Moneyweb

GLOBAL MARKETS

In regular trading on Monday, the Dow rallied 2.66%, the S&P 500 surged 2.59% and the tech-heavy Nasdaq Composite jumped 2.27%.
- The first trading day of October had all three benchmarks rebounding from their lowest levels in about 2 years.
This morning, US stock futures once again higher as weaker-than-expected manufacturing data allayed fears about the Federal Reserve’s aggressive rate hike path.
- The September ISM PMI showed manufacturing activity grew at its slowest pace in 30 months as new orders headed into contractionary territory.
  - Analysts saying a sign that tightening monetary conditions may be taking a toll on demand.
Treasury yields fell on the news, with investors hoping that the Fed would slow the pace of its rate increases.
- Markets now look ahead to the monthly US jobs report due on Friday, as well as earnings reports from a raft of companies this week. Reuters

Bonds:

US 10 YT Yield was lower at 3.62 % on Tuesday October 4, according to over-the-counter interbank yield quotes for this government bond maturity.
- Weaker than expected PMI data, driving yields as growing concerns of an economic contraction caused by high rates and inflation. Source : US treasury
Across the pond, the UK 10Y Bond Yield was 3.95 %, also lower.
- Investors digested news that Finance Minister Kwasi Kwarteng reversed the planned scrapping of the top income tax rate after a public backlash and market turmoil.

YESTERDAY

The Dow added 765 to 29,490
The SP500 gained 92 to 3,678
The Nasdaq added 239 to 10,815

OVERNIGHT HEADLINES

Asian markets skyrocketing higher on the back of a positive session in New York.
- In Japan, the Nikkei 225 gained nearly 2% to above 26,600 on Tuesday, recovering further from over three-month lows
  - The index lifted by a relief rally on Wall Street on the back of falling Treasury yields as soft US manufacturing data.
    - The weaker PMI’s raised speculations that the US Federal Reserve may slow the pace of its rate hikes.
      - Investors also assessed data showing core consumer prices in Tokyo, rose at the fastest pace since 2014 amid broadening cost pressures.
      - However, the BOJ is still expected to maintain ultra-easy policies to support a fragile economic recovery.
- In Australia, ASX 200 Index surged 3.5% toward 6,680, rebounding from an over 3-month closing low.
  - Traders citied a sharp decline in Treasury yields, that triggered a relief rally in stocks after weaker-than-expected US manufacturing data.
    - The data raised hopes that the US Federal Reserve may ease from tightening aggressively.
    - The market also spiking after the RBA surprised the market with a lower than expected 25bps hike vs 50 bps.
    - Heavyweight iron ore miners, led the advance, with strong gains from BHP Group (2.4%), Newcrest Mining (5.1%)

The US dollar declined on Monday following weaker PMI data and a drop in yields.
- The dollar traded 111.6 after facing pressure in recent sessions.
  - The drop in yields indicating that tightening monetary conditions may be taking a toll on demand.
- Thus far the Buck had been supported by a hawkish FED that is expected to keep raising interest rates until it sees compelling evidence that inflation is trending down.
  - New York Fed Bank President John Williams said on Monday that while there are signs of cooling inflation,
    - underlying price pressures remain elevated, reinforcing the case for further monetary tightening.
- This gave rise to speculations that the Fed may slow the pace of future rate increases. FX news
Crude Oil higher in anticipation of more production cuts from OPEC+, who meets in Vienna, Austria.
- WTI crude traded near $84/bl after jumping more than 5% in the previous session.
  - Prices remaining supported ahead of an OPEC+ meeting where it is expected to announce a large supply cut to counter recent weakness in energy markets.
  - The group of major producers is set to meet in Vienna on Wednesday and is likely to reduce output by more than 1 million barrels per day.
  - September witnessed a 4th straight month of price declines as demand concerns continue to weigh on prices. Gulf Energy News
Gold spiked higher, to breach the $1700/oz level following a drop in US treasury yields and a drop in the Dollar.
- The metal surged more than 2% on Monday to the highest levels in nearly three weeks as Treasury yields fell sharply.
- Also the US dollar was knocked back by weaker-than-expected US manufacturing data which raised hopes that the US central bank may slow the pace of its rate increases.
  - Earlier, New York Fed Bank President John Williams said on Monday that US monetary tightening still has “significant ways to go”.
  - He said interest rates have yet to reach restrictive levels for economic growth. Kitco metals report

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