Monday’s Bullseye: 21 September 2020


Here is our week ahead preview for the week commencing 14 September 2020.



This week was void of any major news and except a handful of movers, the markets were largely stuck in holding patterns. Will that change in the week ahead? Although, the economic calendar is going to be light again, there are plenty of macro factors that could provide volatility. Brexit, Coronavirus, and uncertainty over US elections, to name a few.

You didn’t miss much this week

At the time of writing on Friday afternoon, not a lot had changed this week. European and US stock indices were just about holding in the positive territory on the week despite heightened volatility earlier in the week. In FX, the US dollar resumed lower, having started positively following a two-week rebound. But other than the Japanese yen, Chinese yuan and New Zealand dollar, other foreign currencies were largely in holding patterns. The pound, for example, recovered after some positive noise regarding Brexit emerged on Thursday but struggled near the $1.30 resistance area. Precious metals were also stuck in consolidation. Meanwhile stronger Chinese industrial production data helped to lift copper prices to a new 2020 high, while crude oil rebounded sharply after selling off the week prior as demand concerns eased a tad.

Looking Ahead

The upcoming week is unfortunately quite quiet in terms of macro data, until mid-week when the latest manufacturing and services PMIs are released from the Eurozone. More on this later. We also have several speeches by the heads, as well as other members, of UK and US central banks, while the Reserve Bank of New Zealand (RBNZ) and Swiss National Bank (SNB) will be deciding on whether to expand monetary stimulus further.

Here are the data highlights for the week:

Monday: Fed Chair Powell Speaks, along with FOMC members Brainard and Williams 
 
Tuesday: 
  • BOE Gov Bailey Speaks 
  • Fed Chair Powell testimony 
Wednesday: 
  • RBNZ monetary policy decision 
  • Eurozone Flash Manufacturing & Services PMIs, including from Germany and France 
  • UK Flash Manufacturing & Services PMIs 
  • US Flash Manufacturing & Services PMIs 
  • Fed Chair Powell Testifies 
  • US Crude Oil Inventories 
Thursday: 
  • SNB monetary policy decision 
  • German Ifo Business Climate 
  • US Unemployment Claims 
  • BOE Gov Bailey Speaks 
  • US Fed Chair Powell & Treasury Sec Mnuchin testimony 
Friday:  US Durable Goods Orders  
 
European PMIs in focus

Among other data releases, the upcoming PMI data will need to be monitored closely.

On Thursday alone, France saw the highest totals for cases with over 10,000 while Germany recorded the most daily infections since the end of April. Coronavirus cases in Spain are also on the rise with more than new 11,000 cases on Thursday. This has raised fears of a second lockdown that may cripple struggling businesses. The UK health secretary, Matt Hancock refused to rule out a lockdown as hospital admissions in the UK are doubling every 8 days.

As well as the re-emergence of Covid-19 around Western Europe, we also have raised Brexit uncertainty. Judging by a stable euro and stock markets, so far investors have chosen to largely ignore these concerns. But if the surveyed purchasing managers report sharply deteriorating conditions then the financial markets may well respond in a big way.

Negative rates still on the cards for RBNZ?

One of the reasons why the New Zealand dollar has been rallying is due to signs that the recovery in China and Australia, New Zealand’s largest trading partners, have been faster than anticipated. Meanwhile, the domestic economic recovery has also been stronger than expected. This is something New Zealand’s Finance Minister Grant Robertson suggested on Friday. Investors evidently ramped up their kiwi purchasing, with expectations that the stronger recovery might temper a dovish RBNZ. However, if the central bank still suggests that negative rates are on the cards next year, then the kiwi could fall back – at least temporarily.

NZD/USD
Central bank support won’t end anytime soon    

In fact, it is quite possible that the RBNZ will provide a dovish update given the recent strength of the kiwi, which, if not addressed, could hurt the economic recovery as it would make exports dearer and weigh on inflationary pressures. This is something the European Central Bank is also worried about, and no doubt other banks will be too should foreign currencies continue to appreciate against the US dollar. Against this backdrop and other macro concerns, the promise of unlimited bond buying and zero interest rates from major central banks will be here for the foreseeable future.

Indeed, the Federal Reserve, Bank of Japan and Bank of England all held their respective policies unchanged as expected, in mid-week, but maintained a dovish view. The BoE provided a subtle hint for the first time that negative interest rates might be introduced in the UK in the future. The Fed provided a GDP forecast for 2020 which was less pessimistic than in June, thanks to a sharper-than-anticipated recovery in the summer months. However, on the outlook, the Fed and other the two central banks were cautious as they signalled the need to keep monetary policy extraordinary loose for years to come.

To be fair, the global economy needs such stimulus as it tries to recover from the impact of the coronavirus pandemic, which is still showing no signs of easing with reported cases topping 30 million globally this week. Meanwhile there’s growing uncertainty arising from Brexit and the upcoming US presidential election, adding to central banks’ list of worries.

The US heads towards another stimulus

With impact of the initial stimulus waning, there is growing pressure on lawmakers to agree on more funding. On Wednesday, Trump seemingly changed his stance and is now pushing Republicans to embrace more coronavirus stimulus spending. When asked if he backed roughly $1.5 trillion legislation put forward by a bipartisan House group, the president stated he supported something like that. However, the proposal was rejected by democrats who have called for at least $2.2 trillion. The democratic leaders said they “look forward to hearing from the President’s negotiators that they will finally meet us halfway with a bill that is equal to the massive health and economic crises gripping our nation.” Pressure has increased on both sides as the November election looms. Thus, the possibility of a consensus emerging in D.C has increased. If there is agreement on more spending, then there is likely to be more upswing in the markets as confidence grows.  The sooner this is done, the better it will be for the markets.

Precious metals remain fundamentally supported

The promise of more monetary stimulus means bond yields are likely to be held back until when economic recovery is strong enough to boost inflationary expectations in a meaningful way. That’s unlikely to happen any time soon, however. Thus, investor appetite for noninterest-bearing commodities like gold and silver should remain high, as well as for shares of companies with relatively good fundamentals, mainly technology names. Travel stocks will face a bumpy road amid concerns over fresh lockdowns. Banks will likely struggle as low interest rates and yields reduce their profitability.

South African Markets in focus.
By Kearabilwe Nonyana

Over the past couple of months in my previous writing for the weekly Bullseye I have stressed about the markets overlooking of expected inflation and how this will affect monetary policy in the future. In this week I have heard a lot of market commentators start to raise the same issue. In normative economics we were always told that excess money supply leads to demand and demand leads to inflation. It simply boggles the mind why inflation remains at these benign levels. Over the past decade monetary policy has been characterized by record low interest rates and quantitative easing.

This relationship between money supply and inflation seems to no longer have a strong correlation. In my opinion the catalyst for higher inflation will be excess fiscal spending which was brought by the Corona virus. In Japan household income was recorded at its highest after the fiscal support by the government. This excess fiscal stimulus coupled with lower rates leads to higher disposable income and more spending increasing demand. In the South African context, the SARB kept rates on hold citing the potential of negative effects on price stability due to the rand weakening because our carry trade is no longer attractive. The SARB kept rates on hold. Our market followed global markets lower due to the rhetoric of global central bank governors in relation to additional stimulus as well as the views of the global central bank governors on the path to growth recovery.
 
The Week Ahead

South African equities have been feeling pressure over the past couple of days as rising tensions between China and US over the decoupling of trade of the two biggest economies shocks financial markets. On Wednesday CPI data will be released by Stats SA it will be interesting to see the effect of decimated consumption due to lower disposable income on the CPI numbers. It will also be interesting to see the effects of the increasing oil price over the month on the inflation numbers. The SARB in its quarterly projection model sees no decrease in the interest rate but an increase in the rate in the 3rd and 4th quarter of 2021. Be on the lookout for interest rate sensitive stocks like banks and general and clothing retailers to react to that number. A higher than expected CPI number will likely affect these stocks to the downside be weary of this when holding positions. On the FX market any ZAR crosses will have a positive reaction to an increasing inflation number because of the prospects of higher interest rates in future quarters.

Corporate action



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