Markets WRAP: Rand ends the day at R13.82/$

OVERVIEW: European and Asian stocks dropped on Wednesday following the rout on Wall Street, though declines were contained and US equity futures rose after China pledged to start delivering on trade agreements reached with America. The pound stayed higher as the UK government published legal advice relating to its proposed Brexit deal.

Global markets were left reeling following Tuesday’s steep sell-off in New York, but nerves appeared to steady after China’s Commerce Ministry said Beijing will start to quickly implement specific items where there’s consensus with the US and will push forward on trade negotiations within the 90-day “timetable and road map”.

While the Stoxx Europe 600 Index slumped as much as 1.2%, that was far less than the 3.2% plunge recorded by the S&P 500 a day earlier. Futures for America’s benchmark gauge advanced, though the US market will be closed on Wednesday to mark the death of President George H. W. Bush.

Stocks fell in Japan, Korea, Australia and Hong Kong, and China’s yuan gave up some of its recent surge. The pound climbed as investors digested legal advice over Prime Minister Theresa May’s Brexit deal, which confirmed that the so-called customs backstop - the insurance mechanism that kicks in if the Irish border issue cannot be resolved - could remain “indefinitely”.

Benchmark German bunds rose before reversing, while Italian bonds jumped on mounting optimism for a positive end to the country’s budget spat with the EU. The break in trading in the US offers respite to investors after a roller coaster few days, and a chance to reassess what might be behind the latest bout of selling. From the trade war to flattening Treasury yield curve there’s no shortage of culprits, but the underlying narrative appears to be mounting concern that the global growth picture is not as robust as it seems.

China’s announcement, another twist in the trade war saga, was a dose of positive news. It ended days of silence from the Asian nation following a weekend meeting between Presidents Donald Trump and Xi Jinping. Upbeat statements from Trump had not been immediately matched by Beijing, helping fuel the equity tumult.

Elsewhere, Australia’s dollar slid after weaker-than-anticipated economic growth for the third quarter. West Texas oil prices hovered around $53 a barrel as traders await this week’s critical OPEC gathering. Some of the key events investors will be focused on this week: U.S. financial markets are closed Wednesday for a national day of mourning to honor former President George H.W. Bush. Fed Chairman, Jerome Powell’s testimony to Congress scheduled for Wednesday has been canceled. Friday brings the US monthly employment report for November. China November trade data are due on Saturday.

And here are the main moves in markets:

StocksFutures on the S&P 500 Index rose 0.7% as of 13:23 London time. The Stoxx Europe 600 Index declined 0.7% to the lowest in more than a week. The UK’s FTSE 100 Index decreased 1% to the lowest in more than two weeks on the largest dip in almost two weeks. Germany’s DAX Index decreased 0.7% to the lowest in more than a week. The MSCI Asia Pacific Index sank 1%, the largest tumble in more than two weeks.

The MSCI Emerging Market Index sank 1.2%, the biggest tumble in more than two weeks.

Currencies

The Bloomberg Dollar Spot Index declined less than 0.05%. The euro rose 0.1% to $1.1353. The British pound increased 0.5% to $1.2777, the first advance in a week. The Japanese yen declined 0.2% to 113.02 per dollar, the biggest drop in more than a week. BondsGermany’s 10-year yield rose one basis point to 0.27%, the first advance in a week and the biggest rise in more than a week. Britain’s 10-year yield jumped four basis points to 1.322%, the first advance in more than a week and the largest surge in more than three weeks. The spread of Italy’s 10-year bonds over Germany’s decreased eight basis points to 2.8144 percentage points to the smallest premium in two months.

Commodities

West Texas Intermediate crude fell 0.2% to $53.12 a barrel. Gold declined 0.1% to $1,237.52 an ounce. - Bloomberg

Gold just got left behind by one of its sister metals. After a demand-fueled rally over the past four months that’s seen prices hit a record, palladium topped gold. Palladium, which hasn’t traded at a sustained premium to gold in 16 years, has gained as buyers scramble for supplies of the metal used in vehicle smog-control devices.

Demand has risen as consumers turn away from diesel toward gasoline-powered cars, which tend to use more palladium in autocatalysts.“People are grasping for whatever ounces of material they can get” in the palladium market, Tai Wong, head of base and precious metals trading at BMO Capital Markets, said before Wednesday’s levels were hit.

“It’s very expensive to borrow, and that is perhaps the biggest factor driving the spot price higher.” Palladium for immediate delivery climbed as much as 1.9% to a peak of $1,255.83 an ounce, and was at $1,245.67 at 11:17 in London, according to Bloomberg pricing.

Spot gold was 0.1% lower at $1,237.34 an ounce. Palladium’s deficit is set to widen to about 1.4 million ounces in 2019, adding to a shortfall of 1.2 million ounces this year, according to London-based Metals Focus. Supply is likely to remain broadly stable in 2019, while there will be growing demand from the automotive sector, according to Junlu Liang, a senior analyst at the consultancy.

This year, the metal has benefited from quite significant stockpiling from China, however that may slow given the recent surge in prices. “The supply of palladium is very restricted,” said Chirag Sheth, a Mumbai-based consultant with Metals Focus. “The narrowing of the ratio is as much about the strong performance of palladium as about the poor performance of gold.” - Bloomberg

Saudi Arabia’s crude pricing in the world’s biggest oil market is reflecting tumbling profits from making cleaner fuels in Asia. State-run Saudi Aramco slashed the premium of its Extra Light grade to its Heavy crude to the lowest since 2003, data compiled by Bloomberg show.

When lighter varieties of oil are refined, they typically yield more of relatively clean products such as gasoline and petrochemical ingredient naphtha. The market for such fuels has been mired in a glut over the past two months. While the world’s biggest oil exporter cut pricing on all its grades for January sales to Asia in a bid to take back market share lost to the likes of Russia and the US, the significant reduction in the premium for its lighter varieties shows the kingdom is probably taking into account the shrinking margins in the region for cleaner fuels as well as focusing on tackling competition from other sellers.

“Gasoline and naphtha are dying and margins still haven’t reached their worst,” Fereidun Fesharaki, chairman of industry consultant FGE, said in an interview in Singapore. “In Asia, Saudi prices are based on purely product yields and the competition they see from the outside.”

Oil refiners in Asia are fetching better returns by producing dirty fuel oil than from cleaner naphtha for the first time in more than a year, data compiled by Bloomberg show. Concern over falling petrochemical consumption is said to be dragging down prices of the so-called light distillate, while stockpiles swell in the regional trading hub in Singapore.

The gasoline refining margin in Asia was at a discount of 14 cents a barrel to Brent crude on Tuesday, according to PVM Oil Associates data. It had dropped to 66 cents on November 28, the biggest discount since 2011. In China - one of the key markets where Saudi Arabia is seeking to reassert its crude dominance - refineries are doubling down on processing to boost diesel output aimed at heating millions of homes this winter, and therefore contributing to an increase in supplies of other products such as gasoline and naphtha.

The nation has also raised its total fuel-export quotas by 12% for 2018 in a move that would allow more seaborne sales.The premium of Saudi Arab Light crude, which yields more light as well as middle-distillate fuels such as diesel, over Arab Heavy for January sales to Asia also shrank to the smallest since November 2009, data compiled by Bloomberg show.

Meanwhile, with global crude prices stuck in a bear market, OPEC - in which Saudi Arabia is the largest producer - and its allies including Russia will decide this week on output curbs that may reduce export flows starting as early as January. Still, Saudi and Russian officials are said to differ on how to share the burden of any cuts. At the same time, the US is pumping record amounts and shipping more to Asia. “Saudi is facing more competition now and the US competition becomes much bigger next year,” FGE’s Fesharaki said. - Bloomberg

The rand opened the day on the backfoot as the dollar strengthened against most currencies on Wednesday. By 10:50, the rand was changing hands at R13.73 to the greenback and the day's range was between R13.74/$ and R13.88.

Andre Botha, Senior Currency Dealer at TreasuryONE said in a morning note to clients,“Despite the good GDP number, the rand closed yesterday in the R13.80's after reaching a low of R13.55 just after the release of the GDP number.

"The primary driver of the Rand sell-off was out of the US with equities getting hammered with the Dow Jones index closing the day down 3%. Such a hammering in equities is normally equated in the market turning risk averse and with that comes the inevitable slide of risky assets where the rand finds itself.

"The sell-off in equities has caused the market to run back to the US dollar and we have seen dollar firming close to the 1.1300 level after trading comfortably over the 1.1400 level yesterday. Other factors that have caused the market to move yesterday was Theresa May's debate defeat in the UK Parliament which caused the pound and the euro to lose ground.

"In local news, Parliament has adopted the land expropriation without compensation bill and Eskom has continued with load shedding and could have a more significant effect on the market the longer both issues drag on. Today we expect the rand to be on the back foot still, but there is a sigh of relief with the US markets being out of action as a mark of respect for the funeral of former President George Bush. This could keep the rand range bound for the day.”

Load shedding yet another challenge for SA's weak growth, say analysts

Load shedding may have a negative impact on the year's economic growth, analysts have warned.Statistics South Africa on Tuesday released third quarter GDP figures, which reflects growth of 2.2%.

This effectively means the economy has exited the technical recession.Analysts have welcomed the rebound but have warned that the year's growth will still remain weak. Fourth quarter GDP particularly will be impacted by load shedding, which has recently been implemented by power utility Eskom.

Eskom wants state to absorb R100 billion debt, BDay reports

Eskom wants the South African government to absorb about R100bn of debt as part of a rescue plan for the state-owned utility, Business Day reported, a move that will put further strain on already stretched state finances.

The proposal may add 2 percentage points to South Africa’s debt-to-GDP ratio, the newspaper said. It cited Eskom Chairman Jabu Mabuza as speaking on the proposal in an interview during an investor roadshow.

The report comes after Finance Minister Tito Mboweni said Eskom should go to bond markets for funds rather than rely on state bailouts, which have been used in the past. The utility’s debt has increased to R419bn, and the company has resorted to load shedding as insufficient spending on maintenance has reduced its ability to generate electricity.

Tokyo stocks open lower on worries over growth

Tokyo stocks opened lower on Wednesday, following a plunge on Wall Street on worries about US economic growth and with investors cautious ahead of key US jobs data.

The benchmark Nikkei 225 index was down 1.25% or 274.82 points at 21 761.23 in early trade, while the broader Topix index fell 1.36% or 22.41 points at 1 626.79.Japanese shares were also weighed down by a stronger yen against the dollar, which traded at ¥112.69 in early Asian trade, against ¥112.78 in New York and ¥113.15 in Tokyo late on Tuesday.

Tokyo stocks were seen "heavily sold following a dive in US shares... but the focus is on whether share prices will stop falling" during Wednesday's session, said Toshiyuki Kanayama, senior market analyst at Monex.