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21 / 11 / 19
Reuters: Sterling fell for the second straight day on Wednesday, dented by Labour leader Jeremy Corbyn’s better-than-expected showing in a pre-election TV debate versus Prime Minister Boris Johnson who is perceived by markets as more business-friendly. The currency also inched to a one-week low against the euro, though it remains not far from six-month highs given opinion polls show Johnson’s Conservative Party still in with a hefty lead of as much as 18 percentage points before the Dec. 12 election. However, a snap poll released by YouGov immediately after the televised debate showed a “dead heat”, with 51% saying Johnson had emerged the victor while 49% backed Corbyn - a result that analysts said reflected better on the Labour leader. “Given how far Corbyn’s personal ratings are below Johnson’s and how far Labour are behind in the polls, then such a split could be seen as a small victory for the opposition,” Deutsche Bank analysts said.
Tuesday’s testy leadership debate with Corbyn saw Johnson double down on his Brexit promises, saying only he could take Britain out of the European Union quickly. Corbyn said an election win for Johnson would put Britain’s public health service at risk. With the prospect of widespread infrastructure nationalisation under Labour, and an abrupt Brexit possible under Johnson’s Conservatives, many business leaders say they face unprecedented levels of uncertainty. The pound was last down 0.1% at $1.2913, having weakened to a five-day low of $1.2888 against a generally firmer U.S. currency, which was benefiting from renewed concerns over the direction of U.S.-China trade talks. Against the euro, the pound traded down by a similar amount at 85.66 pence, off the six-month high of 85.22 pence it hit on Monday. “Corbyn exceeds low expectations in TV debate,” MUFG wrote. “Opinion polls will now be watched closely to see if the TV debate has a material impact on public support. If evidence begins to emerge of Labour narrowing the Tories’ lead, the pound could come under further selling pressure.” However, a significant shift in opinion polls might be needed to push the pound out of recent ranges. The currency, as well as UK domestic stocks, have rallied this month as betting markets have raised the chances of a parliamentary victory for the Conservatives. On betting exchange Betfair, odds of a Conservative majority have tumbled to 4/9, roughly a 69% probability. “The debate was not a game changer for sterling,” Rabobank currency strategist Piotr Matys, said.
Reuters: The yen rose against the dollar on Thursday after sources close to the White House told Reuters that a U.S.-China trade deal is unlikely this year, shattering investor hopes a partial agreement was imminent and spurring demand for safe havens. The yuan fell to a three-week low in onshore trade on worries the failure to reach a deal to roll back U.S. tariffs could further harm China’s stuttering economy. Political tensions between Beijing and Washington were also keeping investors on edge after a source told Reuters that U.S. President Donald Trump is expected to sign into law two bills intended to support anti-government protesters in Hong Kong. Hong Kong has been rocked by months of increasingly violent protest against Chinese rule of the former British colony. The passage of a U.S. law supporting the protesters is bound to anger Beijing and potentially undermine efforts to secure a trade deal. “Friction between the United States and China is starting to spread from trade to questions about China’s human rights,” said Tsutomu Soma, general manager of fixed income business solutions at SBI Securities Co in Tokyo.
“This is the perfect opportunity to book some profits and unwind some risk-on trades, which is supportive for the yen and government bonds.” The yen rose 0.15% to 108.46 per dollar on Thursday. The Japanese currency briefly pared gains after Bloomberg reported Chinese Vice Premier Liu He as saying he is cautiously optimistic about a preliminary trade deal. Markets, however, turned around again when it became clear the comments were made on Wednesday night in Beijing. The dollar was steady at $1.1077 versus the euro and was quoted at $1.2931 against the British pound. Completion of a “phase one” U.S.-China trade deal could slide into next year, trade experts and people close to the White House told Reuters on Wednesday, as Beijing presses for more extensive tariff rollbacks, and the Trump administration counters with heightened demands of its own. Trump and U.S. Treasury Secretary Steven Mnuchin said in an Oct. 11 news conference that an initial trade deal could take as long as five weeks to ink. Just over five weeks later, a deal is still elusive, and negotiations may be getting more complicated, trade experts and people briefed on the talks told Reuters.
Washington and Beijing have imposed tariffs on each other’s goods in a bitter dispute over Chinese trade practices that the U.S. government says are unfair. The tariffs have slowed global trade, raised the risk of recession for some economies, and roiled financial markets. The next date to watch is Dec. 15, when U.S. tariffs on some $156 billion in Chinese goods are scheduled to take effect. Spot gold, which like the yen is often bought as a safe-haven during times of uncertainty, tacked on 0.1% to $1,473.93 per ounce, underlining investors’ reluctance to take on risk. In the onshore market, the yuan fell to 7.0450 versus the dollar, the weakest since Nov. 1, before steadying at 7.0400. Offshore, the yuan slipped to 7.0533 per dollar, the lowest since Nov. 5, and then pared its losses. Besides the tariff row, Hong Kong has emerged as another flashpoint that some traders say could further worsen U.S.-China relations. What started as a protest against a proposed China extradition bill has widened into almost daily battles with the Hong Kong police over a perceived erosion of liberties under Chinese rule. The police have come under criticism after one protestor was shot at close range. Beijing denies meddling in Hong Kong’s affairs and blames foreign governments for fuelling the unrest.
SOUTH AFRICA OFFICE
South African Rand
BDL: The rand is one of the world’s most volatile major currencies, at the mercy of local political developments and international market movements. Understanding the factors that move the exchange rate between the rand and other major currencies, as well as the longer-term trends, is the key to creating a financial plan that can weather the volatility. Consider how the international political and economic climate affects the value of the rand. Because the rand is one of the more liquid and heavily traded emerging-market currencies, the SA currency is sensitive to a range of international factors beyond the control of the government. For example, when the US Fed signals that it plans to hike interest rates, the rand will often drop in value against the dollar as investors withdraw their cash from emerging-market stock markets and bonds to put it into US treasury bonds instead. Investors often also use assets like US treasury bonds as a safe haven when they become risk averse as a result of negative news elsewhere in the world.
In today’s unpredictable geopolitical and economic climate, there is no shortage of factors that make investors nervous. These range from ongoing woes in emerging markets such as Argentina and Turkey and a slowdown of growth in China to the prospect of a chaotic exit of the UK from the EU, instability in the Middle East and the ratcheting up of the trade war rhetoric between China and the US. As we can see from the volatility of other emerging-market currencies in 2019, the rand would probably be taking some blows this year, no matter what our local political and economic conditions looked like. But there can be little doubt that local factors explain at least some of the deterioration we have seen in the value of the rand in 2019. Many would argue that SA is in a better place than it would be if Cyril Ramaphosa hadn’t ascended to the presidency of the ANC and the republic following the ANC’s Nasrec conference in 2017. However, SA’s economic fundamentals remain weak, and local businesses and international investors alike are impatient with the glacial pace of economic reform. Poor GDP growth is one factor that explains a lack of investor enthusiasm for SA assets, in turn suppressing the value of the rand. Moody’s Investors Service expects SA’s GDP to grow by just 0.7% for 2019 — meaning the country is growing more slowly than some developed markets yet has all the risks of an emerging market. It’s not particularly attractive for foreign direct investment or to foreign asset managers investing in global stock markets. In the background, investors have many other reasons to be worried about SA. Market-unfriendly debates about prescribed assets and land expropriation are still in play, with the outcome of these discussions possibly years away, contributing to continued uncertainty in the market. The spectre of Moody’s downgrading SA’s sovereign credit rating to full junk status is still in the air, along with reluctance on the government’s part to take serious (and politically unpopular) steps to tackle the inefficiencies and high levels of debt at state-owned enterprises. Taken together, these factors seem to suggest we are not likely to see an improvement in the rand’s fortunes any time soon. But it’s also wise to remember that the rand can be volatile in both directions — up and down. It tends to overcorrect in either direction in response to market sentiment. The rand is becoming known as the “wild child of emerging currencies”, frequently showing wider weekly and daily swings in value against the dollar than even notoriously volatile emerging-market currencies such as the Turkish lira or the Brazilian real. Even the most informed guess about where the rand will be at the end of 2020 is likely to be wrong given how sensitive the currency is to global and local influence. But a historical view of the trends over the past 20 years is helpful. In 1999, the rand was trading at about R6.15 to the dollar; 20 years later the exchange rate is around R15 to the dollar. This represents a compounded annual deterioration of about 4.5% a year in the value of the rand against the dollar. The structural nature of the SA economy — especially the inflation rate — makes it likely that this trend will continue into the future. Thus, taking a long-term view on a portfolio and positioning it for offshore exposure will help to protect an investor from currency volatility and the probable decline in the rand’s global purchasing power. It is wise to look at a diversified portfolio that maximises exposure to global growth while mitigating risk to manage the effect of the rand on an investor’s wealth. At 0500 GMT the rand was at 14.75 to the dollar, 16.34 to the euro and 19.08 to the pound.
Reuters: Global shares slid on Thursday as a fresh row between Washington and Beijing over U.S. bills on Hong Kong could complicate their trade negotiation and delay a “phase one” deal that investors had initially hoped to be inked by now. MSCI's broadest index of Asia-Pacific shares outside Japan fell 1.2%, with Hong Kong's Hang Seng shedding 2% while Japan's Nikkei dropped 1.6%. Chinese mainland shares dropped 0.6%. U.S. S&P500 futures dropped 0.5% in Asian trade, a day after MSCI's broadest gauge of world stocks fell 0.4%, the biggest fall since early October. On Wall Street, all three major indexes fell, with the S&P 500 losing 0.38%. The U.S. House of Representatives on Wednesday passed two bills intended to support protesters in Hong Kong and send a warning to China about human rights. The legislation, which has angered Beijing, has been sent to the White House for President Donald Trump’s approval. A person familiar with the matter said Trump was expected to sign it.
“China will surely take this as an interference into its domestic affairs and is likely to think it will no longer need to make concessions on trade,” said Norihiro Fujito, chief investment strategist at Mitsubishi UFJ Morgan Stanley Securities. The move came as trade experts and people close to the White House said completion of a “phase one” U.S.-China trade deal could slide into next year, as Beijing presses for more extensive tariff rollbacks, and the Trump administration counters with heightened demands of its own. Trump said on Oct. 11 that the deal could take as long as five weeks, and investors had initially expected an agreement by mid-November. Asked Wednesday about the status of the China deal, Trump told reporters in Texas: “I don’t think they’re stepping up to the level that I want.” Trade jitters sent the 10-year U.S. Treasuries yield down to 1.707%, near its lowest levels in three weeks and down more than 25 basis points from a Nov. 7 peak of 1.973%, a three-month high. Similarly in the currency market the yuan hit three-week lows, trading as low as 7.0450 to the dollar in onshore trade. The dollar slipped 0.3% against the yen to 108.31, compared to this week's high of 109.07 touched on Monday, while safe-haven gold edged up 0.26% to $1,474.9 per ounce. The euro was little changed at $1.1075. Tomoo Kinoshita, chief economist at Invesco Asset Management in Tokyo, said the market is unlikely to completely give up hopes on the trade deal. “There have always been some uncertainties in trade talks but that won’t erase positive effects from signs of bottoming out in the global manufacturing sector,” he said. The minutes from the Federal Reserve’s previous policy meeting published on Wednesday offered little guidance on what would cause policymakers to change their minds on the outlook after an increasingly divided Fed decided to hit pause in its easing cycle. Oil prices also dipped, paring some of their 2% gains made on Wednesday after a better-than-expected U.S. crude inventories report and as Russia said it would continue its cooperation with OPEC to keep the market balanced. Global benchmark Brent futures dropped 0.4% to $62.16. U.S. West Texas Intermediate (WTI) crude futures were down 0.39% at $56.79 per barrel in early Thursday trade.