HUNT FOR HIGHER YIELDS CONTINUES
The hunt for higher yielding emerging markets bonds continued over the week, causing emerging market currencies to strengthen and their bond yields to fall. The rand was no exception, ending the week at R13.49/USD (1.83% appreciation) while the Brazilian real closed at 3.19/USD for the week (0.67% appreciation).
In the US, Fed governor Jerome Powell gave markets clarity by stating that he is in no hurry to raise interest rates, owing to the risk that inflation stays below target, the possibility of weaker growth for a longer period of time and the effect that global risks might have on the US economy. He added that the mere speculative activity in the markets as to when the Fed would raise interest rates had strengthened the dollar, which has adversely affected economic growth.
Earlier in the week the BOE struggled to buy as much long gilts (over 15 years) as it had planned despite higher than market prices in its new QE program. The problem is that holders of these gilts, notably pension funds and insurance companies, are reluctant to part with them as these are instruments they hold for coupons to pay their future liability streams. Only £1.118bn was bought rather than the £1.17bn planned. The BOE’s struggle to find long UK gilts to buy is a concern given that it was only the second day of their new QE program.
30 year UK gilts traded at 1.24% at Friday’s close and if we have more failed purchase programmes like last week’s, then the gilt looks cheap at current levels. In addition, the 30y UK gilt is trading cheap to the 30y bund (0.40%), the 30y French bond (0.9%) and the Swiss equivalent a 0.12%. The BOE effect continues to add a gravitational pull to bond yields around the world.
A host of mixed economic news released in Asia showed July imports in China fell to -12.5% y/y when market expectations were -7.0% y/y. On the other hand, exports also fell disappointingly to – 4.4% y/y when expectations were at -3.5% y/y. This lead to an increase in the Chinese trade balance in July (USD52.3bn) up from June (USD48.1bn). Chinese CPI for July met expectations at 1.8% y/y while Chinese PPI for July surprised on the upside coming in at -1.7% y/y. In Japan, PPI for July also surprised on the upside at -3.9% y/y, above expectations of -4.0%y/y. In the meanwhile, the Reserve Bank of New Zealand cut interest rates by 25bps to a record low 2.0%, citing low inflation and a strong currency as reasons for the rate cut.
With risk-on trades dominating sentiment, emerging markets outperformed developed markets over the week. The MSCI Emerging Market Index and the MSCI World Index ended up 2.77% and 1.13% respectively.
MINING & MANUFACTURING DATA BETTER THAN EXPECTED
South African mining and manufacturing production data released last week beat expectations. The market consensus forecast for mining production was for a slight improvement to -3.5% y/y in June. In the event, it printed -2.5% y/y. Coal was the main positive contributor to mining output (+4.6% y/y), while negative contributors were manganese (- 18.2% y/y), diamonds (- 38.9% y/y) and nickel (- 26.1% y/y).
Market consensus for manufacturing production was for a moderation from 4.0% y/y in May to 3.1% y/y in June. They in fact both surprised on the upside, mainly supported by petroleum and chemical products (+15.4% y/y) as well as wood products (+ 4.4% y/y). Both mining and manufacturing production are expected to make a positive contribution to Q216 GDP, which gets released in September.
In line with other emerging markets, the JSE All Share index ended the week 0.88% higher and 5.75% higher year-to-date. The JSE Resource 20 Index was up 0.26% and the JSE Financial 15 Index up 2.13% for the week. Relative to other Emerging Markets, the rand was the sixth best performer for the week, below the Colombian Peso, Mexican Peso, Hungarian Forint, Turkish Lira and the Chilean Peso. This week, there will be keen interest in the retail sales data released on Wednesday.
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