Markets WRAP: Rand closes at R13.90/$

The rand closed at R13.90 to the greenback on Thursday afternoon. The day's range was R13.82 to R13.95.

Andre Botha, Senior Currency Dealer at TreasuryONE said earlier that the rand and other emerging markets were on the front foot.

Brazil President Jair Bolsonaro is taking a page from US President Donald Trump’s Twitter habits: commenting on financial markets. The country’s equity benchmark Ibovespa index has hit fresh records amid expectations that Bolsonaro and his economic team will tackle Brazil’s fiscal woes and move to shore up Latin America’s largest economy.

The real is leading gains in emerging markets this year, and bond risk measured by five-year credit-default swaps is at the lowest level since May.

“The stock exchange hit another record high. The global scenario has added to the optimism with Brazil and the new government,” Bolsonaro wrote on his Twitter account on January 9.

“With fiscal health and economic freedom, let’s restore confidence in our country!”

Bolsonaro is a prolific Twitter user, with almost 3 million followers, and recently has started posting in English as well as Portuguese. It was the second straight day he took to the platform to comment on market moves. Still, Brazil’s president has a ways to go to catch up with his US counterpart.

Since his election, Trump has tweeted about the stock market more than 35 times, though it’s been a lot less frequent since equities took a dive at the end of 2018. The Ibovespa is up 6.1% in January, trading at around 93 000. The most optimistic strategists say it could reach 120 000 by year-end. - Bloomberg

OVERVIEW: The new-year rally in global equities stalled on Thursday as investors paused to draw breath following the recent rebound. Oil threatened to post the first drop in two weeks.

The lack of any concrete details from trade discussions between China and the US meant there was no fresh catalyst to sustain momentum, and futures for the S&P 500, Dow Jones and Nasdaq all declined after the underlying gauges rose four days straight.

The Stoxx Europe 600 Index erased some of Wednesday’s advance. Japanese stocks paced declines across much of Asia, though the MSCI Asia Pacific Index was down only marginally.

Treasuries edged up amid a broad advance in bonds, while the dollar stabilised and the offshore yuan climbed to the strongest since August. West Texas oil dropped to around $52 after surging into a bull market this week. The euro struggled for traction after yet more underwhelming economic data, this time from France.

Global stocks have rallied since the start of the year amid optimism tensions are thawing between the US and China on trade and as commentary from the Federal Reserve showed policy makers have shifted to a more cautious approach to further interest-rate increases.

Still, concern surrounding the partial government shutdown in America continues to weigh on sentiment ahead of earnings season. And China inflation data on Thursday showcased slowing growth in the world’s second-biggest economy.

“Volatility is here to stay, but you use volatility to your advantage to take some chips off the table when you start to see a bit of a rebound in the market,” Nathan Thooft, head of global asset allocation at Manulife Asset Management, told Bloomberg TV in Hong Kong.

Elsewhere, the pound weakened as British Prime Minister Theresa May mulled options for a Brexit “Plan B.”

Gold fluctuated and emerging-market shares climbed.

Here are some events investors may focus on this week:

Fed Chairman Powell will speak to the Economic Club of Washington D.C. on Thursday. Britain’s Parliament this week resumes a debate on the Brexit withdrawal bill, with Prime Minister Theresa May seeking to avoid defeat in a vote set for the week of January 14.

These are the main moves in markets:

Stocks

Futures on the S&P 500 Index sank 0.5% as of 11:22 London time, the first retreat in a week. The Stoxx Europe 600 Index fell 0.3%, the biggest fall in a week. The UK.s FTSE 100 Index decreased 0.1%. Germany’s DAX Index fell 0.2%, the biggest fall in a week. The MSCI Asia Pacific Index fell less than 0.05%, the first retreat in more than a week. The MSCI Emerging Market Index jumped 0.3% to the highest in five weeks.

Currencies

The Bloomberg Dollar Spot Index rose less than 0.05%. The euro decreased less than 0.05% to $1.1539. The British pound declined 0.3% to $1.2756. The Japanese yen increased 0.1% to 108.06 per dollar, the strongest in a week.

Bonds

The yield on 10-year Treasuries decreased one basis point to 2.70%. Germany’s 10-year yield dipped two basis points to 0.26%, the first retreat in a week and the biggest dip in more than a week. Britain’s 10-year yield fell one basis point to 1.251%, the lowest in a week. The spread of Italy’s 10-year bonds over Germany’s rose five basis points to 2.6512 percentage points.

Commodities

West Texas Intermediate crude decreased 0.7% to $51.98 a barrel, the first retreat in two weeks. Gold rose less than 0.05% to $1,294.09 an ounce, the highest in a week. - Bloomberg

Oil traded near a one-month high after entering a bull market, while the tension between an uncertain economic outlook and efforts by OPEC to restrict supplies continued to cause volatile trading.

West Texas Intermediate slipped 0.5% after a rally on Wednesday brought crude’s rebound from an 18-month low in December to 23%.

Prices had climbed as Saudi Energy Minister Khalid Al-Falih expressed confidence that production curbs by the OPEC+ coalition would balance the market. Yet investors remain wary as they await concrete details of the US-China trade negotiations, which are clouding the economic outlook.

Oil’s eight-day gain through Wednesday marked its longest advance since mid-2017, reflecting a return of economic optimism as the US and China worked on resolving their trade dispute and the Organisation of Petroleum Exporting Countries began production cuts. Yet an increase in American petroleum inventories on Wednesday served as a reminder that booming US shale-oil production may still leave the global market with more supply than it needs.

“The pessimism of market participants at the end of the year was excessive, and so we expected prices to rise,” said Eugen Weinberg, head of commodities research at Commerzbank AG in Frankfurt. “However, for a further price increase, a decisive action by OPEC is necessary.”

WTI for February delivery traded at $52.12 a barrel, down 24 cents, on the New York Mercantile Exchange as of 10:35 London time. Prices surged 5.2% on Wednesday to the highest since December 13.

Brent for March settlement fell 16 cents to $61.28 a barrel on the ICE Futures Europe Exchange in London, and traded at an $8.81 premium to WTI for the same month. The global benchmark crude has also jumped more than 20% since December 24, meeting the definition of a bull market.

US Stockpiles

While the US Energy Information Administration reported that crude inventories shrank by 1.68 million barrels last week, the steepest drop since November, there were substantial increases in supplies of refined products such as gasoline. Overall, the petroleum inventory build was a massive 13.3 million barrels, the second week in a row it gained by more than 10 million. The risk of a surplus emerging has stirred Saudi Arabia, OPEC’s biggest producer, to try and reassure markets that the cartel and its partners are taking action.

Energy Minister Al-Falih said in Riyadh on Wednesday that the 1.2 million-barrel-a-day cut promised by the coalition will be more than sufficient to balance the market. He added that he “would not rule out calling for further action of some kind” if the current strategy proves inadequate.

Meanwhile, the US and China wrapped up three days of mid-level trade talks on Wednesday, boosting the S&P 500 Index for a fourth day to the highest in almost a month. Negotiations were “extensive, in-depth and detailed,” and laid the foundation for the resolution of issues of mutual concern, China’s Ministry of Commerce said in a statement.

The US said it wants any deal to include “ongoing verification and effective enforcement.” Also on Wednesday, minutes of the Federal Reserve’s December meeting showed policy makers were attentive to recent financial-market volatility and risks to the outlook.

Growing investor optimism helped overshadow a government report showing a steep inventory jump for US gasoline and diesel, a bearish signal for future crude demand.

Other oil-market news: The  Bloomberg Dollar Spot Index dropped to the lowest level in more than three months on Wednesday, increasing the appeal of commodities denominated in the US currency. Norway’s oil and gas regulator reduced its forecast for production this year, as crude output is set to be lower than previously expected. Alberta’s government maintained its mandated oil curtailment in February at the same level as January even as Canadian heavy-oil prices surged. - Bloomberg

The world’s two biggest economies are separately struggling to come in for unparalleled, simultaneous soft landings, an effort complicated by the trade war they’re waging at the same time.

It’s hard enough for the US or China to pull fiscal and monetary levers to manage a step-down in growth alone. For the two to try to do it concurrently makes what is already “a fairly narrow target even narrower,’’ said Deutsche Bank Securities’ chief economist Peter Hooper.

A misstep would also turn what’s supposed to be a controlled touch down of their economies into something much worse - a worldwide recession.

While most economists say that’s unlikely, they acknowledge that it can’t be ruled out, especially if the temporary trade truce between the two countries breaks down or if equities keep sliding.

“If we get an escalation in trade tensions and another 10 to 15% drop in the stock market, you’re looking at enough of a tightening in financial conditions to say that a global recession is a real risk,’’ said Hooper, a former Federal Reserve official.

Negotiations between the US and China in Beijing this week on trade were “extensive, in-depth and detailed" and laid a foundation for a resolution, China’s Ministry of Commerce said on Thursday.

The attempted maneuver by the Fed and Chinese authorities comes as the global economy enters 2019 showing signs of slowing, with the world’s No. 4 economy, Germany, flirting with a recession.

Complicating the task is President Donald Trump.

He has welcomed China’s economic troubles as giving him added leverage in trade talks with the Asian country, while he’s attacked Fed Chairman Jerome Powell for trying to slow the US economy with interest-rate increases.

Policy makers are cognisant of the dangers and are acting accordingly. Minutes from the Fed’s December meeting showed that interest rates could go on hold through March or longer as officials wait for clarity on risks to global growth that could affect the US economy.

Speaking to economists in Atlanta this month, Powell raised the possibility of a pause in the Fed’s rate hiking campaign and a change in its balance-sheet reduction plans.

China, meanwhile, continues to roll out measures to put a floor under its economy, including last week’s announcement of a cut in the amount of cash lenders must hold in reserves that freed up a net 800 billion yuan ($117 billion) of liquidity.

The Finance Ministry is set to propose a small increase in the targeted budget deficit for this year, people familiar with the matter said.

Maintaining expansions in gross domestic product is tricky because authorities have to walk a fine line between slowing the economy just enough to prevent overheating or financial excesses but not so much as to cause a contraction.

Indeed, the Fed has arguably only accomplished the feat once, in 1994 and 1995, and even then there was a lot of collateral damage, including a hard landing for the bond market. China managed a slowdown in 2015 by ramping up spending, a tactic that cushioned growth but accelerated a build-up in debt that economists warn is unsustainable.

Trump has befogged the Fed’s task this time around first by juicing growth in 2018 with tax cuts and stepped-up government spending, and then by effectively acting to restrain it in 2019 as his trade war rhetoric spooked businesses and investors.

“It wrong-footed the Fed twice,’’ said David Hensley, director of global economics for JPMorgan Chase in New York. The president’s unrelenting attacks on the central bank also hurt because they threaten to undermine the Fed’s standing with investors and the American public.

“Obviously the president has the right to comment on the Fed, but I would worry that if it continues or intensifies that it could undermine confidence in the Fed - and the market confidence in the Fed’s judgment,’’ former Chair Janet Yellen said in Atlanta, in a rare joint appearance with Powell and ex-Fed chief Ben Bernanke.

And while Trump has cheered China’s slowdown, Powell and the Fed are concerned about it spilling over into financial markets and the US.

Market Spillovers

Seeking to allay investor fears of a Chinese hard landing, Powell told the American Economic Association’s annual meeting last week that the country’s authorities are responding to signs of weakness in their economy with additional stimulus.

“China and the rest of emerging Asia should continue to expand at a still solid pace this year,” Powell said. Some of the deceleration in China’s economy was self-induced as policy makers sought to dampen frothy property markets, curb leverage and crack down on shadow banking.

“We had been expecting the slowdown for quite some time,’’ Louis Kuijs, chief Asia economist at Oxford Economics in Hong Kong, told Bloomberg Television. What did surprise China was Trump’s assault on the country’s mercantilist economic policies, resulting in tariffs on some $250 billion worth of Chinese exports to the US, Hensley said. That threatened a bigger downshift in growth than China wanted. Chinese officials have responded with selective stimulus measures to try to prop up growth while eschewing their traditional approach of opening up the credit spigots.

Cliff Tan, MUFG Bank’s East Asia head of global markets research, said that China may no longer be able to engineer a soft landing of its economy. “China may see a very rocky landing, lasting five to six quarters’’ sometime over the next four years, Tan wrote in a report to clients. “The primary driver of China’s slowdown is not the trade war, but local credit problems.’’

Either way, the ability of both nations to guide their economies will dominate the global outlook through 2019.

“Soft landings are really, really hard,’’ said Carl Tannenbaum, chief economist at Northern Trust in Chicago. - Bloomberg

Bianca Botes, Corporate Treasury Manager at Peregrine Treasury Solutions said in a morning note to clients that the rand held steady during the Federal Reserve's minutes on Wednesday.

"The US central bank maintained its dovish stance, while warning of a potential recession should rates be hiked too rapidly. The next decision is due in March.

"Yesterday saw a slight uptick in the local Manufacturing PMI, which accelerated to 50.7 points from 49.5 points, indicating an increase in activity within the manufacturing sector.

"Markets are still waiting for the outcome of the US-China trade talks, however the dollar remains subdued as a result of both this and the Fed’s dovish outlook.

"Local manufacturing production and US initial jobless claims will be two sets of data to keep an eye on today, while the ECB will deliver the outcome of its monetary policy meeting, setting the tone for the euro. 

"The expected range for the rand against the greenback today is R13.80 to R13.95."

The rand is on the front foot this morning, says Andre Botha, Senior Currency Dealer at TreasuryONE. The rand was changing hands at R13.86 to the greenback by 10:17.

“The rand and other EM's are on the front foot this morning as developments across the pond have led to an increase in risk sentiment. The major factor last night was the release of the Fed minutes which suggested that the Fed will be more cautious with their rate hiking path than initially expected.

"A key takeaway from the minutes is that the Fed is worried about market disruptions and the real concern of lower than expected global growth. They stated that due to this, the Fed can be patient and for lack of a better word sit on their hands and ride out the uncertainties especially on the back of the low inflation environment the Fed can afford a brief respite.

"We have also seen Gold surging following the Fed minutes and is within touching distance of $ 1300 per ounce. There is still some optimism in the market regarding the possible developments in the US-China trade talks. The sentiment flow is quite clear regarding the outcome of the talks, with a resolution being good for EM's and vice versa. 

"The momentum is on the side of the EM's with the rand looking comfortable in the R13.80's. We expect some resistance at the R13.80 level and we could expect the rand to test that level during the day.”

Tokyo stocks open lower on profit-taking - AFP

Tokyo stocks opened lower on Thursday as investors were seen taking profits after three days of rallies and as fears over the US government shutdown weighed on the market.

The benchmark Nikkei 225 index was down 0.86% or 174.95 points at 20 252.11 in early trade, while the broader Topix index dropped 0.83% or 12.67 points at 1,522.44.

"As the Nikkei 225 has gained about 900 (points) in the past three days, and as the meeting between US President Donald Trump and Democratic leaders ended without a deal, investors are discouraged" to buy shares, Okasan Online Securities said in a statement.

More Fed officials favour rate-hike pause

Four Federal Reserve regional chiefs declared that the central bank can take its time to assess market turbulence and risks to the US economy before adjusting monetary policy again, solidifying support for a pause from interest-rate increases.

Their voices, atop the new tone of caution set last week by Fed Chairman Jerome Powell, reinforced the message that policy makers will very likely take a break from raising rates in the coming months after lifting borrowing costs four times in 2018, a pace that upset investors and President Donald Trump.

"We have good capacity to wait and carefully take stock of the incoming data and other developments," Chicago Fed President Charles Evans said Wednesday, citing the lack of evidence that inflation was heading meaningfully above the central bank’s 2 % goal.

Asian markets retreat after rally, strong yen hits Tokyo

Asian markets turned south Thursday as investors took a breather after rallying this week on optimism over China-US trade talks and the Federal Reserve's softer tone on interest rates.

There was also growing unease over the US government shutdown, which is now in its third week, after President Donald Trump walked out of a meeting with Democrats to resolve the issue, meaning it will likely drag on for some time to come.

Tokyo led the losses, with exporters hit by a rising yen against the dollar after minutes from the Fed's latest policy meeting showed the policy board happy to slow its pace of rate hikes to prevent a slowdown in the economy.