Markets WRAP: Rand closes at R13.77/$ as focus turns to rates announcement

The rand closed at R13.77 to the greenback on Tuesday afternoon. The day's range was R13.75 to R13.83.

Bianca Botes, Corporate Treasury Manager at Peregrine Treasury Solutions said earlier that with the rand finally breaking below R13.80/$ towards the end of trading on Monday, it has ratcheted another leg stronger. 

"Our focus shifts towards the SARB Monetary Policy Committee which starts its three-day meeting today, leading up to the interest rate announcement on Thursday... The rand is on a stable footing against US dollar, with a range of R13.68 to R13.88 expected for the day."

OVERVIEW: Technology shares gained, buoying major indexes, after China ratcheted up stimulus measures to combat slowing growth. Treasuries and the dollar advanced.

The S&P 500 edged higher as senior Chinese officials vowed to cut taxes to boost the economy, lifting technology companies battered by concerns about the rising impact of the US-China trade war.

Banking shares weighed on benchmarks after JPMorgan reported its worst quarter for bond trading in a decade.

Adding to caution, the bank’s head Jamie Dimon warned that the ongoing government shutdown could cause a recession.The 10-year Treasury yield fell below 2.70%, while the dollar gained against major peers. In Europe, stocks declined and the euro dropped after German data confirmed the weakest year for growth since 2013.

The pound fell as UK politicians prepared for a vote on Brexit. Oil rose above $51 a barrel.

The potential stimulus in China and warm welcome it received from markets reflects the delicate balance underpinning 2019’s risk-asset rebound: The same weak macro data that prompted a sell-off at the end of last year has the potential to spur looser monetary policies and therefore ignite a rally. Plenty of risks are clouding the outlook, not least the ongoing US shutdown and the increasingly frantic countdown to Brexit.

Investors must also factor in corporate earnings as the results season gets underway.

Here are some important events coming up:

Some of the world’s biggest banks announce earnings, including Bank of America, Morgan Stanley and Goldman Sachs. Alcoa, Indian IT company Mindtree, Netflix, Taiwan Semiconductor, American Express and BlackRock also post results.

These are the main moves in markets:

Stocks

The S&P 500 Index rose 0.2% as of 09:32 New York time. The Stoxx Europe 600 Index fell 0.1%. Germany’s DAX Index declined 0.2% to the lowest in a week. The MSCI Asia Pacific Index rose 1.1% to the highest in almost six weeks. The MSCI Emerging Market Index gained 1.1% to the highest in six weeks.

Currencies

The Bloomberg Dollar Spot Index climbed 0.1% to the highest in a week. The euro declined 0.2% to $1.1443, the weakest in more than a week. The British pound fell 0.2% to $1.2832. The Japanese yen dropped 0.3% to 108.44 per dollar, the biggest fall in more than a week.

Bonds

The yield on 10-year Treasuries fell one basis point to 2.70%, the lowest in more than a week. Germany’s 10-year yield decreased two basis points to 0.21%, the lowest in more than a week. Britain’s 10-year yield declined four basis points to 1.257%, the largest drop in almost two weeks.

Commodities

West Texas Intermediate crude climbed 1.8% to $51.42 a barrel. Gold fell 0.1% to $1,292.50 an ounce. - Bloomberg

The pound may manage to hold its ground if Theresa May’s Brexit deal is defeated in Parliament by 100 votes or less, as the market would then eye the odds of the prime minister seeking a second vote, analysts say.

The UK premier’s widely unpopular pact with the European Union will face the House of Commons Tuesday, where she will need a majority of lawmakers to vote favourably for the agreement to be approved.

A loss by more than 100 votes could raise risks - including that of a leadership challenge by the opposition and of a subsequent election - that would send sterling lower.

Below is a compilation of analysts’ views on the likely outcome of the meaningful vote, and the potential sterling reaction:

ING Groep NV

If a modified deal gets through (10% chance), GBP/USD will jump to $1.38, while under a no-deal scenario on March 29 (20% chance), GBP/USD will sink to $1.12, said Petr Krpata, chief EMEA FX and rates strategist. The most positive outcome for the pound is a second referendum with an extension of Article 50, though the reasons will be key for the pound: If that’s because of a general election (15% chance), sees GBP/USD dropping to $1.20. If extended because MPs get the government to pursue a different deal (25% chance), GBP/USD could rise to $1.35. If because of a second referendum being called (25% chance), GBP/USD will jump to $1.40.

Credit Agricole

May’s loss with “a margin of 100 votes or less could see the pound consolidating further,” said head of G-10 currency strategy Valentin Marinov. “A greater margin than this coupled with a vote of no confidence by Labour could see sterling relinquishing its recent gains.” GBP/USD will be around $1.25 if May loses by more than 100 votes; says CA has a trade that targets $1.39 in six months as it sees sterling embarking on an uptrend.

Mizuho Bank

“If she loses by 100 votes or less, I think she still has a chance,” said Neil Jones, head of hedge-fund currency sales. If May is defeated by more than 220 votes, sterling could fall to $1.225. On a loss by a margin of 20 to 100 votes, pound could rally to $1.3350; a rejection by 20 votes would see sterling rally with potential to reach $1.35.

Danske Bank

A loss by more than 100 votes will be negative for the pound initially, according to analyst Morten Helt. Base case is that May’s deal will fail to get Parliament’s approval, “after that, we are in uncharted territory”. Probability of another meaningful vote is high, while likelihood of a second referendum is also increasing.

Call for a second referendum could also come after a potential second vote sees GBP/USD around 1.25-1.30 until further clarification.

“Extension of Article 50 would be positive for GBP as it reduces the probability of a no-deal scenario. However, it depends on the reason behind a possible extension.”

Commerzbank

“Our UK analyst assumes that the magic number might be somewhere around 40 - losing with a lower margin keeps the hopes alive that the proposal could be accepted at some point following repeated votes,” said foreign-exchange strategist Esther Reichelt. “Losing by a higher margin keeps all options on the table, including a new government one way or the other (i.e. voluntarily or forced)”.

Loss by a narrow margin would be sterling-neutral or slightly positive; rejection by large margin “would most likely be substantially GBP-negative if she doesn’t manage to officially delay the Brexit process (that is, delaying Article 50 procedure) beforehand.”

Rabobank

“Bearing in mind that the EU is not showing any sign of giving ground, May would likely have to lose the vote by a much smaller margin than expected for the market to believe that she could win it in a second round - probably less than 50 votes,” said Jane Foley, head of Group of 10 currency strategy.

GBP would likely be encouraged on this outcome and rally to $1.30, as it signals May’s position isn’t as weak as is currently believed and would reduce the chances of Labour Party’s Jeremy Corbyn calling a no-confidence vote. A loss by more than 200 votes would likely make it difficult for May to hold onto her leadership; markets fear a general election. A far-left Labour government would weigh on pound - GBP/USD would drop to $1.15/$1.20 levels. - Bloomberg

The rand is presently changing hands at R13.79 to the greenback.

Andre Botha, Senior Dealer at TreasuryONE said in a morning note to clients, “The rand is a funny old beast as it strengthened to below the R13.80 level yesterday evening, touching key technical indicators like the 200-day moving average which would imply a run lower should the level be broken and sustained.

"The rand has also ignored local politics for the most part, but negative sentiment could be around every corner. The backdrop of the recent rand rally has been kind of strange as we have seen bad Chinese and European numbers which will fuel the flames about concerns of global growth.

"This usually is EM negative, but it seems that the EM's have shrugged off data. The overall feeling is that the rand could enjoy short term gains but that as the year plays out, there are too many variables that will cause volatility and the rand will be influenced by that.

"In saying that, we believe that this is a really good time for importers to start looking at taking out some cover as the rand has strengthened over 5% based on overseas factors with little help from local events to justify the move.

"The US dollar is still the compass of the market, so it would be prudent to observe it to gauge sentiment in the short term.”

Asian markets rebound 

Asian markets on Tuesday rebounded from the previous day's sharp losses but investors remain wary of any further sign of weakness in the global economy while the pound extended gains ahead of a crunch Brexit vote later in the day.

China's disappointing trade data on Monday sent shivers through trading floors as it showed the long-running US tariffs row is beginning to bite.

But dealers got back on the horse, resuming last week's rally that was fuelled by optimism that Beijing and Washington will eventually resolve their differences and the Federal Reserve will pause in raising interest rates.

Moody's: SA's future looks brighter - if it can keep the lights on

Gradually improving growth prospects across sub-Saharan Africa means 15 of 21 sovereigns rated by Moody's have a stable outlook, versus six with a negative outlook – but the region's major economies, including SA, still face substantial risks.

According to the report, SA has a more stable outlook going into 2019, thanks to a gradual strengthening of institutions and increasing transparency.