Today's Talking Point Oil update Analysis: Oil prices are edging lower this morning, taking direction fro
Today’s Talking Point
Oil update
Analysis: Oil prices are edging lower this morning, taking direction from the broader commodities complex after some disappointing news out of China over the weekend. The authorities in China held their National Peoples Congress, which was widely expected to see new stimulus measures and a positive growth target for the year announced. The final outcome was less than expected, with the target set at 5% for 2023 and no new major supportive measures announced. As such, we have Brent slipping back down towards the $85 per barrel handle in early trade this morning, while WTI has slipped back down to $79 per barrel. Limiting the losses is Saudi Arabia’s price increase for April crude shipments to Europe and Asia. With the China NPC announcements out of the way and the news coming in a little lacklustre, focus will shift again to central banks and their push to contain inflation. Fed Chair Powell’s speech this week will be closely eyed and could keep oil under a bit of pressure and drive a pullback after the commodity posted some notable gains last week.
Rand Update
President Cyril Ramaphosa will finally announce the details of a highly-anticipated cabinet reshuffle today. According to his spokesperson, Vincent Magwenya, the formation of a new executive will “reinforce government’s focus” to achieve the goals set out in the SONA address last month and “build on the commitments government has made for faster growth through our investment drive, economic reforms, public employment programmes, and expanding infrastructure programmes.” Among the new appointments will be a new deputy president, while the vacant positions of public service minister and electricity minister will likely also be filled.
Whether the cabinet reshuffle will have any material impact on the trajectory of the ZAR remains to be seen, although it appears unlikely as the focus at the start of the week is on external developments. Specifically, markets are digesting the 2023 growth target set by the Chinese government yesterday, which were relatively modest at around 5%. Still, while this growth target was on the low end of expectations, it remains high and will provide significant support for the global economy at a time when many major economies are facing recessionary pressures. And given South Africa’s strong trade ties with China, the Asian nation’s rebound bodes well for economic development domestically.
Regarding the rest of the week, note that the local data card heats up with the publication of Q4 GDP stats on Tuesday. Consensus expectations as per Bloomberg surveys are pointing to a slight quarterly contraction, with severe load-shedding, a failing logistics network, higher costs of living, and elevated interest rates expected to have taken a toll on economic growth. A shock print may hold some market-moving potential, although the spotlight will be shared with Fedspeak and US jobs data later in the week. These could trigger a repricing of US rate-hike risk, which is driving the bulk of market directionality at the moment.
A further decline in US Treasury yields at the start of the new week has supported risk appetite and weighed on the USD to some degree. However, the USD-ZAR is set for a slightly higher open as investors await fresh catalysts to provide directional inspiration. The pair is currently trading comfortably between 18.0000 and 18.2500, taking on a more consolidatory tone after bouncing off the 18.5000 resistance level last week. This is unlikely to last, however, with the week ahead holding plenty of market-moving data releases and events.
Bond Update
Bonds/Yield Curve: This week’s GDP report will support a recovery in SA bonds. Add to that the dip in US Treasury yields last week Friday, and domestic bonds should start the week on a firmer footing. Any ZAR strength that materialises at the start of the week will assist, although the upcoming cabinet reshuffle holds some risks from a political and fiscal perspective. Fiscally, a smaller cabinet would be welcome, although that is perhaps expecting too much. Operationally, Ramaphosa needs a cabinet that will try to facilitate the resolution of Eskom before next year’s elections. Therefore, serious growth and fiscal considerations will arise from this cabinet reshuffle, making it an important market development. Ahead of the announcement, some consolidation is likely.
FRAs: FRAs have sourced direction from ZAR and bond movements. This week they will have the added consideration of the weaker GDP reading that will raise questions about whether the SARB should lift rates any further, given the absence of domestic demand. Towards the end of last week, the middle to longer-dated FRAs enjoyed some receiving interest and reflected less conviction of the need for two more rate hikes. That will undoubtedly change if the ZAR can appreciate through the 18.00 handle, although there are many reasons why investors will take it easy and not adopt any clear-cut position ahead of key events over the next two days.
Repo: As anticipated, the SARB hiked by 25bp at the last meeting. It ensured that any compression of the spread between SA and the US would not impact the ZAR too severely. The Fed’s latest move to hike by only 25bp reflects this, although the ECB and the BoE did move by bolder 50bp increments. There may be at least one more 25bp rate hike left, but that depends on how the ZAR performs and whether inflation moderates.
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