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Morning NOTE

7 December 2022

GOOD MORNING

The ZAR consolidated around the 17.3000 handle, ignoring global risk off and a spike in the Dollar. 

SUMMARY

  • The Rand traded in a narrow range as markets focus on international developments and appears to be ignoring Ramaphosa’s problems.
     
  • US yields have rebounded following strong ISM data and markets turning their attention to Thursday’s PPI data.
    • The dollar recovered across the board, on Risk off sentiment after JP Morgan’s CEO said the US likely to face a recession in 2023.
    • He cited high interest rates and also inflation as have a negative affect on consumer spending.
       
  • The ZAR however ignoring the rebound and continues to gain strength from the HIGHLY UNLIKELY scenario of Cyril being removed.
    • Attention will thus once again switch to the Risk trade and US yields.
       
    • Markets are trading with a “risk off “ tone, ahead of next week’s December FED meeting and Dimon’s comments.
      • The FED is widely expected to hike 50 bps and then slowdown in 2023.
         
    • On the back of this we expect some session weakness, but maintain the outlook for a stronger ZAR in 2023.
       
  • Earlier in the session, the ZAR received a boost following better than expected SA GDP data.
    • Stats SA reported that GDP rose by 1.6% in Q3 for QoQ to September of 2022,
    • It was above market forecasts of a 0.6% increase, and also following a 0.7% contraction in the prior quarter.

Significant Market Data:

Yesterday

  • 11h30 : SA GDP GROWTH Q3 YOY +0.4% EXPECTED VS 0.2% PREVIOUS
    • Actual was 1.6% better than expected

 
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 opening inside the previous session and the current week’s range of 17.5000-17.1400
    • The local unit pivoting around the 17.3000 level.
    • Expect some early ZAR gains (market maker stop hunts)
      • … before more weakness on the back of the global risk off back drop.
      • …The narrow ranges signalling a market looking for direction from  “new NEWS / DATA”.
         
  • Last night, Risk sentiment turned negative as Stocks fell and the USD recovered.
    • Comments from JP Morgan CEO Jamie Dimon, causing a bit of angst as investors exited Risk assets as he called for a Recession in 2023.
    • The environment indicating the possibility of a weaker ZAR this session.
       
    • Yesterday’s better than expected GDP data was ZAR supportive and we do expect ZAR gains on the back of a “dovish” Fed in 2023
       
  • Today, expect some ZAR weakness as Dollar shorts get squeezed following the Risk sell-off in New York.
    • A break of 17.3800 to target 17.5000.

Trade :  BUY USDZAR ON DIPS .

Expected Ranges

  • USDZAR :  Expect a range 17.1800-17.4800
    • Importers 17.2800-17.1800
    • Exporters 17.3800-17.4800
       
  • EURZAR :  Expect a range of 18.0000-18.2700
    • Importers 18.0900-18.000
    • Exporters 18.1800-18.2700
       
  • GBPZAR :  Expect a range of 20.8300-21.2200
    • Importers 20.9600-20.8300
    • Exporters 21.0900-21.2200

OPENING RATES

  • USDZAR 17.3200
  • EURZAR 18.1100
  • GBPZAR 21.0000

SOUTH AFRICA

  • Opposition parties are not letting up in their demand for a parliamentary portfolio committee that will exercise oversight over the Presidency.
    • They say the longer Parliament drags its feet on the matter, the more it will again be found wanting.
    • The repeated call has once again been made as the House prepares to debate the president’s conduct,
    • This on the back of findings by an independent panel that he may have violated the Constitution and anti-corruption laws. EWN
       
  • Eskom has announced that power cuts will be moved up to stage 4 on Wednesday morning.
    • The ramped-up power cuts will kick in at 9am until further notice.
      • The power utility said that this was due to further breakdowns to some of its power plants as well as the delay in generating units.
    • Eskom said “Due to further breakdowns and delays in the return of generating units to service, stage four load shedding will be implemented from 9am.” News24 
       
  •  Fitch Ratings warned that President Cyril Ramaphosa’s Phala Phala scandal added risk to the country’s policy outlook.
    • Following the release of a damaging Section 89 panel report into the saga, Ramaphosa faced an onslaught of criticism from the political fraternity.
    • The rating agency warned that political instability and a sketchy policy outlook could further weigh on short-term investment prospects if they weaken business sentiment.
    • Despite the warning, the United States-based credit rating agency said broad policy continuity was the likely outcome, even if Ramaphosa resigned. IOL

GLOBAL MARKETS

  • On Tuesday, the Dow fell 1.03%, the S&P 500 dropped 1.44% and the Nasdaq tumbled 2%, with ten out of 11 S&P sectors closing in negative territory.
    • The moves came after JPMorgan Chase CEO Jamie Dimon saying that persistently high inflation will dent consumer spending and most likely drag the world’s largest economy into a recession next year.
    • This morning, stock futures steadied in Asian trade.
    • Futures contracts tied to the three major indexes drifted flat to slightly positive.

Bonds:

  • The  US 10-year yield consolidated around 3.5%, as investors piled into government debt amid prospects that the Federal Reserve will soon slow its pace of rate hikes and fears of an economic slowdown.
    • While better-than-expected ISM services and Jobs data brought some uncertainty regarding the Fed funds terminal level,
    • Markets continued to price a 50 basis points hike in December.
    • On top of that, some sectors of the US economy, including housing and industry, have been flashing recessionary signs.
      • also, the gap between 2 and 10-year bond yields widened to over 80 basis points, the largest since at least 1981.

YESTERDAY

  • The Dow fell 350 to 33,596
  • The SP500 fell 57 to 3,941
  • The Nasdaq fell 225 to 11,014

OVERNIGHT HEADLINES
 

  • Asian markets trading lower on the back of a sell-off on Wallstreet
    • In Japan, the Nikkei 225 fell 0.6% to 27,700, resuming a recent downtrend and taking cues from a negative session on Wall Street.
    • Recession warnings were raised by US Bankers, notably JP Morgan’s Jamie Dimon, who said :
      • “ persistently high inflation will dent consumer spending and most likely drag the world’s largest economy into a recession in 2023”.
    • Investors also reacted to data showing the sentiment of large manufacturers in Japan improved in December, though the outlook remained soft.
    • However, technology stocks led the decline, with notable losses from Tokyo Electron (-2.7%).  Reuters
       
    • In Australia, the ASX 200 dropped 0.85% to close at 7,229 and also declining for the second straight session.
      • Investors reacted to data showing the Australian economy expanded less than expected in the Q3,
      • Traders citing persistent inflation and rising interest rates, affecting consumption.
      • On Tuesday, the RBA raised its policy rate by 25 basis points and said that it expects to tighten further to bring down inflation.
        • So far the RBA has lifted the cash rate for the 8th consecutive month and taking borrowing costs to a 10-year high of 3.1%.
        • Australian shares also tracked losses on Wall Street overnight as top US bankers sounded the alarm over a possible recession.
        • Technology stocks also led the decline, like in Japan.  Reuters
           
  • The US dollar rallied to remain above the 105.75 level on Wednesday after rising for two straight sessions.
    • The Buck supported by concerns about a possible recession that hurt risk sentiment and the prospect of higher interest rates.
    • Bankers in the USA also warned of an impending economic slowdown,
      • saying that persistently high inflation will dent consumer spending and most likely drag the world’s largest economy into a recession next year.
      • The market expects the Fed to deliver a more moderate 50 basis point rate hike at its December meeting following four straight 75 basis point increases,
        • though questions on how long the central bank will need to tighten remain.
  • Crude oil futures traded near $74/bl after falling for three straight sessions.
    • Prices remaining under pressure as economic warnings from major US banks weighed on the demand outlook and hurt risk assets.
    • The US oil benchmark is hovering near its lowest levels after JPMorgan CEO Dimon said, inflation and high rates, would most likely drag the world’s largest economy into a recession next year.
      • Investors also fretted about the prospect of higher interest rates as surprisingly strong US services and jobs data bolstered the case for further monetary tightening.
      • These factors have overshadowed market optimism stemming from easing Covid restrictions in top crude importer China.

 

  • Gold remained under pressure below $1800/oz after its recent decline to around $1,770/oz 
    • Bullion facing renewed pressure from a resurgent US dollar after better-than-expected US services activity data suggested the Federal Reserve could raise interest rates for longer to cool demand.
      • 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 in the US.
      • 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.
      • Higher interest rates dampen gold’s appeal to investors as they raise the opportunity cost of holding non-yielding bullion.

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