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Morning NOTE

6 December 2022

GOOD MORNING

The ZAR weakened on the back of stronger than expected US ISM Services data that showed Inflation remains a threat.

SUMMARY

  • The Rand weakened to 17.480 on the back of higher than expected US services data, that showed higher prices.
    • This is a follow up on last week’s stronger than expected Jobs data as well as a rise in Average hourly wages in the world’s largest economy.
       
  • The Fed continues to battle to bring down inflation and various Fed governors have voiced concerns about the “labour/wages/ services” component.
    • They are usually more “sticky” to get down.
      • Atlanta Fed president Raf Bostic continues to mention this in the various speeches he has given.
    • The ISM Services PMI unexpectedly jumped to 56.5 in November from 54.4 in October which was the lowest reading since May of 2020, and beating market forecasts of 53.3.
       
    • On the back of the data the 10YT yield spiked to 3.60% and the SP500 fell below 4,000 i.e. RISK OFF !!! 
       
  • Traders citing that although markets have priced in 50bps for December, there was an expectation that January meeting would be 25bps,
    • However , bets have now increased that it will also be 50bps – hence the bearish sentiment and a recovery in the Dollar.
    • The DXY trading higher at 105.47

Significant Market Data:

 MONDAY

  • 17h00 : US ISM NON-MANUFACTURING PMI’S FOR NOVEMBER +53.1 EXPECTED  VS 54.4  PREVIOUS
    • Actual was 56.5 vs 53.3 forecasted
  • 17H00 : US FACTORY ORDERS FOR OCTOBER +0.7% EXPECTED VS +0.3%
    • Factory orders also surprised to the topside with +1% vs +0.7% expected

TUESDAY

  • 11h30 : SA GDP GROWTH Q3 YOY +0.4% EXPECTED VS 0.2% PREVIOUS

 
WEDNESDAY

  • 12h00 : EU GDP GROWTH Q3 TOT +1.7% EXPECTED VS 2.7% PREVIOUS

 
THURSDAY

  • 11h00 : SA CURRENT ACCOUNT Q3   R-140BN EXPECTED VS -R87BN PREVIOUS
  • 13H00: SA MANUFACTURING  OCTOBER YOY -1.7% VS +2.9% PREVIOUS

 
FRIDAY

  • 15H30 :  US PPI NOVEMBER YOY +7.2% EXPECTED VS 8% PREVIOUS
  • 17H00 : US MICHIGAN CONSUMER SENTIMENT 57 EXPECTED VS 56.8 PREVIOUS

Today:

  • The ZAR opened WEAKER on back of  stronger than expected US ISM Data, that continues to point to elevated US inflationary conditions.
    • US bond yields spiked and the Dollar rebounded.
    • The ZAR trading at 17.4500 vs a strongest level of 17.1400 in late afternoon JHB trading on Tuesday.
       
  • Markets remain nervous around the situation surrounding President Cyril Ramaphosa.
    • It appears that he will survive any impeachment attempts as the ANC close ranks around their leader,
      • and if so is likely to triumph at leadership conference later this month.
      • AND  ensure another term as president.
      • Of course , the risk remains if some ANC NEC members decide to turn against him and agree on impeachment.
         
  • This remains a large risk for ZAR gains. 
     
  • Longer term we do expect ZAR gains on the back of a “dovish” Fed, that indicated their willingness to slowdown rate hikes.
  • The ZAR and other risk assets will benefit in this environment.
     

Today, given The rebound in the Dollar and rise in US yields, we expect a weaker ZAR.
This morning expect some stop hunting for a move lower before buying finding support., below the Asian low.
This will likely be good Dollar buying opportunities .
 
Trade :  BUY USDZAR ON DIPS.

Expected Ranges

  • USDZAR :  Expect a range 17.2600-17.5900
    • Importers 17.3700-17.2600
    • Exporters 17.4800-17.5900
       
  • EURZAR :  Expect a range of 18.1700-18.4100
    • Importers 18.2500-18.1700
    • Exporters 18.3300-18.4100
       
  • GBPZAR :  Expect a range of 21.1200-21.3900
    • Importers 21.2100-21.1200
    • Exporters 21.3000-21.3900

OPENING RATES

  • USDZAR 17.4500
  • EURZAR 18.3000
  • GBPZAR 21.2500

SOUTH AFRICA

  • Ramaphosa managed to win a crucial vote at the NEC debate to move the Phala Phala report to next week.
    • Opposition parties say the ANC’s NEC’s decision to reject the Section 89 panel report won’t change their approach and vote for the establishment of an impeachment inquiry.
    • Acting ANC,  secretary-general Paul Mashatile told the media following Monday’s special NEC meeting that the party would vote to oppose the establishment of the inquiry.
      • He addressed the media shortly before the party’s parliamentary caucus met where he communicated the decision to members.
      • The EFF & DA  have both called on the ANC MPs to vote in support of the establishment of an impeachment inquiry. EWN
         
  • However the EFF looks to press ahead for force an impeachment inquiry.
    • Their leader Malema, saying he believes it has the numbers to ensure MPs vote in favour of an impeachment committee which could see President Cyril Ramaphosa booted out of office.
    • MPs at the National Assembly are set to debate the Phala Phala matter next week.
    • This on the back of the release of a Section 89 panel report which found that the president may have breached the Constitution and broke anti-corruption laws. NEWS24
       
  • Johannesburg weather
    • Hailstones covered parts of Johannesburg in a white blanket as a thunderstorm swept across the city on Monday afternoon.
    • Branches and leaves struck down by the hailstones were seen lying on many streets.
    • The thundershower brought with it heavy rain, damaging winds and large amounts of hail.
    • Large hailstones battered windows as the storm broke suddenly after midday. IOL
       

GLOBAL MARKETS

  • US stock futures consolidated after the major sell off during Monday’s session.
     
  • Traders citing better-than-expected US services activity data suggested the Federal Reserve could raise interest rates for longer.
    • In regular trading on Monday, the Dow fell 1.4%, the S&P 500 dropped 1.79% and the Nasdaq tumbled 1.93%, with all 11 S&P sectors closing in negative territory.
      • The November services activity data, along with the November jobs report released last week, pointed to a resilient economy.
      • Still, the market is expecting the Fed to deliver a more moderate 50 basis point rate increase at its December meeting.
    • Investors now look ahead to US trade data that could throw light on the state of the global economy, as well as more earnings reports from US firms.

Bonds:

  • The yield on the US 10-year increased toward 3.6%, up from an over 10-week low of 3.5% hit on December 2nd,.
    • The  surprising improvement in the US services sector lifted expectations the Federal Reserve will keep its aggressive tightening to curb inflation.
      • The ISM Services PMI unexpectedly jumped to 56.5 in November, rebounding from a more than 2-year low of 54.4 hit in October and beating market forecasts of 53.3.
      • The report comes after last week wrapped up with stronger-than-expected jobs data.
    • Last week the he US economy added a net 263k jobs during November, well above market forecasts of 200 thousand and showing further evidence that the jobs market remains tight.
      • Earlier, Fed Chairman Powell said that it may be appropriate to slow the pace of interest rate increases as there are recent data points to a slowdown in the US economy.

YESTERDAY

  • The Dow fell 482 to 33,947
  • The SP500 fell 72 to 3998
  • The Nasdaq fell 221 to 11,239

OVERNIGHT HEADLINES

  • Asian Markets were mixed on Tuesday following a selloff on Wall Street overnight as better-than-expected US services activity data stoked fears that the Fed could raise interest rate for longer.
    • Australian shares also declined as the RBA raised its policy rate by 25 basis points to 3.1%, taking borrowing costs to a level not seen in a decade.
    • In Japan, the Nikkei 225 rose 0.24% to close at 27,886, though gains were capped after better-than-expected US services activity data stoked worries that the Fed could raise interest rates for longer.
      • Investors also reacted to data showing household spending in Japan rose the least in five months,
      • while real wages fell to an over seven-year low as rising inflation outpaced modest growth in nominal wages.
    • In China, the Shanghai index added 0.02% to close at 3,213,
      • Markets higher as China continued to shift away from strict Covid restrictions.
      • Beijing announced that it is joining other cities in removing testing requirements to enter public venues.
      • Reuters reported that China could announce a further relaxation of Covid restrictions as early as Wednesday . REUTERS
         
  • The US dollar held its recent advance to above 105 on Tuesday, supported by renewed concerns that the Federal Reserve will keep on raising interest rates following better-than-expected US services activity data.
    • The November ISM Services data, along with the solid November jobs report released last week, pointed to a resilient economy and bolstered the case for further monetary tightening.
    • Still, the market is expecting the Fed to deliver a more moderate 50 basis point rate hike at its December meeting following four straight 75 basis point increases
    • BUT questions on how long the central bank will need to tighten remain.
      • The dollar held recent gains against the euro, sterling and yen, while facing renewed pressure from the Aussie Dollar after the RBA raised interest rates further. FX NEWS
  • US WTI crude  oil  rose above $77/bl on Tuesday, snapping a 2-day decline as easing Covid restrictions in China buoyed the demand outlook.
    • Supply-side uncertainties triggered by fresh sanctions on Russian oil kept the market on edge.
    • China easing restrictions as  major cities scrapped testing requirements that have hindered movement in the world’s top crude importer.
    • The shift in China’s Covid response was among several factors considered in OPEC+’s decision to maintain its current output policy.
    • Traders concerned after the higher than expected ISM data signalling the FED will  need to tighten for longer. GULF ENERGY NEWS
       
  • Gold held its recent decline to around $1,770/oz.
    • Bullion under pressure following stronger than expected US ISM services data and a spike in US yields and the US Dollar.
    • Still, the market is expecting the Fed to deliver a more moderate 50 basis point rate hike at its December meeting following four straight 75 basis point increases,
    • But
      • questions remain on how long the central bank will need to tighten remain.
    • Higher interest rates dampen gold’s appeal to investors as they raise the opportunity cost of holding non-yielding bullion. KITCO METALS REPORT

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