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DAILY BRIEF

 

 

The Daily Brief is a free email sent out each morning with information about overnight market movements and insights into the issues of the day. The brief is free and will help you keep an up-to-the-minute eye on the currency markets.

 

19 / 08 / 19

LONDON OFFICE

 

British Pound

Reuters: The pound gained for a second consecutive day on Friday after a stream of resilient economic data calmed sentiment on the health of the UK economy and as opposition parties launched plans to block a no-deal Brexit. British retail sales unexpectedly expanded in July and signaled that consumers were taking the prospect of Brexit in their stride for now, helped by firm wage data and modest inflation pressures, according to data released earlier this week. “This suggests consumer spending is still holding up and still supporting the economy even though overall output contracted in the second quarter,” said Marshall Gittler, chief strategist at ACLS Global. “It ties in with the relatively high wage growth that we saw earlier in the week.”


Further fueling demand for the British currency, especially against the euro this week, was growing momentum to try to stop Prime Minister Boris Johnson from taking Britain out of the European Union at the end of October without a deal. Against the euro, the pound scaled a 11-day high against the single currency, up 0.5% at 91.45 pence. Versus the dollar, the pound rose for a second consecutive day, up 0.3% at $1.2121 and is poised for its biggest weekly rise since late June. The opposition Labour party said it would call a vote of no-confidence in Johnson’s government as soon as it believes it can win it and seek to form a temporary government under leader Jeremy Corbyn to delay Brexit. While derivatives indicate market players may be trimming back some short sterling positions, the currency’s prospects remain clouded by the risk of Britain exiting the European Union without a divorce agreement.

 

US Dollar

Reuters: The dollar ended roughly flat on Friday, retracing the morning’s move higher, after worries tied to trade tensions and a Federal Reserve rate cut weighed on consumer sentiment and a report that Germany may run a deficit to boost growth lifted the euro. Germany’s right-left coalition government would be prepared to ditch its balanced budget rule and take on new debt to counter a possible recession, Der Spiegel magazine reported on Friday. The news lifted the euro against the dollar, but the single currency nevertheless remained 0.14% lower on the day at $1.1091. “EUR-USD reversed from over two-week lows to highs of $1.1106 at mid-morning. The move higher came as reports circulated that Germany may shift to deficit fiscal spending should Germany head into recession,” wrote analysts at Action Economics.


“The FX market is geared up for further easing from the European Central Bank in September, though more talk like this will keep ongoing pressure on EUR-USD.” Earlier Friday, the euro fell to a two-week low of $1.1067, shy of the two-year low of $1.1025 it reached on Aug. 1. Friday morning's fall was caused by growing expectations of an interest rate cut by the European Central Bank after Governing Council member Olli Rehn suggested on Thursday the central bank could restart its quantitative easing program and was open to extending it into equity purchases. “Global markets started Friday in a better mood with sentiment boosted by expectations for the European Central Bank to err on the side of bold stimulus as soon as central bankers’ coming meeting on Sept. 12,” said Joe Manimbo, senior market analyst at Western Union Business Solutions. Also pulling the dollar lower was the University of Michigan consumer sentiment index which fell to 92.1 early this month, the lowest reading since January, from 98.4 in July. The survey’s current conditions measure dropped to its lowest level since late 2016. The consumer sentiment data came after the Treasury yield curve inverted this week, which historically has preceded U.S. recessions. The inversion stoked worries about the impact of the Sino-U.S. trade war. The curve was slightly steeper on Friday at 6.1 basis points. Measured against a basket of six other major currencies, the dollar was higher by 0.05% at 98.197. It has recovered by 1.20% from its three-week low on Aug. 9.

SOUTH AFRICA OFFICE

 

South African Rand

EWN: South Africa’s rand firmed on Friday, adding to the previous session’s gains as hopes of further stimulus in China helped developing world currencies hold their ground against the dollar. At 1505 GMT the rand was 0.34% firmer at 15.2275 per dollar, bringing gains to 1.2% since Wednesday when the currency tumbled to just shy of an 11-month low. The rand has fallen more than 6% since the beginning of August, pressured by the rising likelihood of a credit ratings downgrade by Moody’s linked to a massive, additional bailout for state power firm Eskom and signs of slower global growth. “The rand is among the biggest losers of the recent depreciation trend among many EM currencies as a result of falling global risk appetite,” Commerzbank said in a note.


“Moreover there are considerable domestic risks including the possible downgrade of South Africa’s sovereign rating to junk status.” Moody’s is the last of the three big international ratings agencies to rate South African debt at investment grade. South Africa’s rating with S&P Global Ratings and Fitch has been non-investment grade since 2017. On the bourse, the broader All-share index ticked up 0.06% to 53,875 points and the benchmark Top-40 closed up 0.09% at 48,158 points. Paper and packaging company Sappi gained 5.22% to R44.91, while Discovery rose 4.41% to R110.06 and Bidvest climbed 3.16% to R178.97. The biggest faller on the blue-chip index was chemicals and energy Sasol, which shed 4.73% to close at R265.00 after the company announced it would delay its annual financial results due to “control weakness” at its US ethane cracker project. “The delay of results and announcing an independent review is a huge red flag,” said Byron Lotter, a portfolio manager at Vestact. Sasol spokesman Alex Anderson said the group’s financial controls were sound and it had no concerns about its financial reporting. The Foschini Group also fell 3.26% to R145.00 after announcing it was reviewing its Kenya and Ghana stores. Bonds firmed, with the yield on benchmark 10-year government paper due in 2026 down 5.5 basis points to 8.385%.

 

Global Markets

Reuters: U.S. and European stocks surged on Friday on expectations the European Central Bank will cut interest rates but the dollar pared gains against the euro after a report said the German government was prepared to take on new debt to lift the economy. The dollar hit a two-week high against the euro as expectations of ECB stimulus weighed on the single currency and bullish data showing a jump in U.S. homebuilding permits to a seven-month high also helped lift the greenback. But German and other euro zone government bond yields rose late Friday on a Der Spiegel report. Borrowing costs had plumbed new lows throughout the week as investors unnerved by the prospect of European recession piled into safer assets. The euro rebounded to pare most losses after Der Spiegel magazine said the German government would be prepared to ditch its balanced budget rule and take on new debt to counter a possible recession.


Germany’s Finance Ministry declined to comment on the report. There has been a rising drumbeat of news recently from German politicians and businesses calling for a stimulus program, said Karl Schamotta, director of global markets strategy at Cambridge Global Payments in Toronto. “Markets are still betting on a raft of stimulus measures from the ECB in September and that is having a pretty strongly negative effect on the euro,” Schamotta said. “But in the near term, this idea that we could see more spending out of Germany is helping to alleviate that.” The German 10-year bund yield rose to a negative 0.688%, having earlier hit a record low of negative 0.727%. Rates turned negative in March and have trended lower since May. The rebound in equity markets buoyed investor sentiment, though it is hard to say the recent rout has found a floor despite cheaper prices, said Yousef Abbasi, global market strategist at INTL-FCStone Financial in New York. U.S. banks are likely to get cheaper because European banks are likely to do so if the ECB does not put together a credible off-set plan for further negative rates for banks, he said. “That’s the concern. Despite some equities looking attractive the macro concern is giving investors a reason to pause and not so aggressively buy the dip,” Abbasi said. Technology shares led Wall Street’s advance but U.S. stocks posted a third straight week of declines, battered by the U.S.-China trade row and an “inversion” of 2- and 10-year bond yields that sparked fears of a recession. MSCI's gauge of stock performance in 47 countries gained 1.18% and its emerging market rose 0.69%. In Europe, the FTSEurofirst 300 index of leading regional shares closed 1.23%. The Dow Jones Industrial Average rose 306.62 points, or 1.2%, to 25,886.01. The S&P 500 gained 41.08 points, or 1.44%, to 2,888.68 and the Nasdaq Composite added 129.38 points, or 1.67%, to 7,895.99. The euro earlier slid to $1.1090, shy of a two-year low it set two weeks ago, on reports the ECB's Olli Rehn had suggested Thursday that a significant easing package was needed in September. The dollar index rose 0.06%, with the euro down 0.15% to $1.1089. The Japanese yen weakened 0.23% versus the greenback at 106.35 per dollar. The German 10-year bund posted a fifth straight week of declines, Italy’s 10-year bond yield set its biggest weekly fall since late 1997 and the decline in Spanish 10-year yields were the largest since at least 1994. The benchmark 10-year U.S. Treasury notes fell 9/32 in price to push yields up to 1.5589%. Crude oil prices recovered from two days of declines after data on Thursday, showing a rise in U.S. retail sales, helped ease recession concerns. A bearish outlook from OPEC capped gains. Brent crude rose 41 cents to settle at $58.64 a barrel while U.S. crude settled 40 cents higher at $54.87 a barrel. U.S. gold futures settled down 0.5% at $1,523.60 an ounce.

 

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