Morning NOTE

GOOD MORNING

The ZAR weakened aggressively on the back of a broad US Dollar rally as investors looked for safe-haven currencies.

• USDZAR 16.6000
• EURZAR 17.0200
• GBPZAR 19.8000

SOUTH AFRICA   

• Unions accepted the Wage offer from Eskom that includes a 7% increase and a R400 housing allowance.
  • Coupled with NUM and NUMSA, Solidarity also confirmed they had accepted the offer from Eskom.
  • Analysts however warning that this does not imply an end to Load shedding.
  • The utility had for weeks blamed the rolling frequent power cuts on labour unrest as workers took part in unlawful strikes.
  • However, the relief South Africans have been hoping for will not come about immediately.
• Changes to Regulation 28 of the Pension Fund Act, allows funds to invest 45% offshore.
  • The changes have been discussed since 2019, when National Treasury first mentioned that it was time to update regulations.
  • These changes to legislation were gazetted this week.
  • Although Reg 28 enforced diversification, asset managers have complained that certain of the limits restricted prudent fund management principles. Money Web

• Soaring inflation.

  • The latest Household Affordability Index from the PMB,  Economic Justice & Dignity Group [PMBEJD], shows that the price of a basic household food basket is up by 13.6% year-on-year in June.
    • This basket now costs R4 688 and is a R560 increase from a year ago.
    • In addition, food price inflation experienced by those in upper income households is almost certainly even higher than 14%.
    • Anecdotal evidence suggests that prices of prepared produce and meat are, on average, easily more than 20% higher than a year ago. Moneyweb

GLOBAL MARKETS

Stocks:

• Shares all sideways in Asian markets after Wall Street staged a dramatic intraday rebound, as falling Treasury yields provided a boost to growth-oriented technology stocks.
  • Futures contracts tied to the three major indexes drifted flat to slightly negative.
• In regular trading on Tuesday, US stocks came well off the day’s lows, with the Nasdaq Composite gaining 1.75% and the S&P 500 adding 0.16%.
  • Meanwhile, the Dow erased much of the day’s losses, but still closed 0.42% lower.
• Technology stocks outperformed on Tuesday as Treasury yields tumbled on recession fears, while energy firms lagged behind the market on falling oil prices.
  • Concerns that the Federal Reserve’s aggressive fight against inflation might result an economic downturn have been weighing on markets.
  • Investors now look ahead to the minutes of the last central bank meeting, manufacturing PMI data and the JOLTS report due later on Wednesday.

Bonds:

• The yield on the benchmark US 10-year note continued to fall to 2.8% in the first week of July.
  • It was a level not seen since early June, as recession risks loom.
  • The 2-year, 10-year part of the curve reinverted, a move that is usually seen as an indicator that a recession will follow in one-to-two years.
  • The Fed is set to raise interest rates by either 50bps or 75bps this month, and investors worry that high borrowing costs could severely hurt economic growth.
  • The focus this week will be on the FOMC minutes and the jobs report, which are expected to provide an update on the size of this month’s Fed rate hike and the labour market resilience.

YESTERDAY

• The Dow  fell 129 to close at 30,967
• The SP500 gained 6 to trade at 3,831
• The Nasdaq  rallied 194 to close at 11,322

Futures Trading:

• image : Trading economics

OVERNIGHT HEADLINES

• Asian markets lower following the sell-off in Wall Street.

  • In Japan, the Nikkei 225 fell 1.2% to 26,090, erasing gains from the previous session, as mounting fears of a potential recession spurred a fresh wave of selling in equities and other risk assets.
    • Such fears were driven by aggressive interest rate hikes among major central banks aimed at curbing high inflation.
    • Commodity-linked stocks led the decline on weaker oil and metals prices, however technology and healthcare stocks mostly advanced.
• In Australia, the ASX 200 fell 0.2% to below 6,620 and ended a  a two-day rally, as mounting fears of a global recession weighed on energy and mining stocks.
  • Stocks led the decline after oil prices tumbled overnight as markets price in a potential recession.
  • Australian miners also slumped on weaker metals prices, including BHP Group (-4.2%), Fortescue Metals (-4.7%), Rio Tinto (-4.9). TE

• Crude oil

  • WTI crude fell  more than 8% to close below the key level in the previous session, as mounting fears that a recession will hurt demand were balanced by persistent supply concerns.
    • The bounce was attributed to short-covering and bargain hunting.
    • Oil prices have been declining since mid-June as concerns about a potential recession rattled financial markets.
      • Citibank said oil prices could tumble to $65 a barrel by the end of year if an ”increasingly likely” recession hits the global economy.
    • WTI traded at $99/bl (vs high $119/bl) and Brent $103/bl (vs High $122/bl). Source : Energy News

• Gold prices fell more than 2% to $1,764/oz, the lowest December of 2021.

  • Traders citing fears over a looming recession fuelled a rush to the safe-haven greenback and interest-yielding Treasury notes.
  • This move further eroding the bullion’s store of value appeal.
  • The Federal Reserve cemented expectations for an extended monetary tightening path, with multiple policymakers advocating for another aggressive 75bps rate hike in July to curb surging consumer prices. Source :  Kitco metals

• The US dollar traded sharply higher, rising more than 1% to 106.5 a level not seen since November of 2002.

  • Traders citing fears of a recession and safe have n buying.
  • The euro, which makes up 58% of the dollar index, fell sharply following a slew of downbeat PMI readings and as investors fear that the natural gas crunch may tip Germany’s economy.
  • The euro depreciated below $1.03, its lowest level since December 2002
  • An energy crisis in Europe has clouded even further the outlook for growth in the Eurozone, making the ECB’s task of taming record levels of inflation more difficult.
  • The annual inflation rate in the Euro Area increased to a new record high of 8.6% in June of 2022.  Forex news

• The British pound fell more than 1% towards $1.1900, hitting its lowest point since the pandemic outbreak in March 2020.

  • The Pound collapsing following news of the resignation of the British Finance minister Rishi Sunak.
  • The former minister posted his resignation letter to the Prime Minister on Twitter, minutes after Health Secretary had also decided to leave the Boris Johnson-led government.
  • The Tory resignations have brought back concerns over another no confidence vote in the British parliament, following months of political instability within the party and over the party-gate investigations.
  • Earlier, the sterling pound was already facing downside pressure amid growing concerns about a looming recession.
  • Additional concerns were raised on the  uncertainty over the Northern protocol and softening expectations about the scope of the Bank of England’s tightening outlook.