New week, same China
Another week has opened and China’s risks are all that is being talked about. With the circuit breaker on the Shanghai Composite disabled last week, it was an altogether less frenetic sell off than the ones we saw last week.
Comments from a senior official in the Chinese government that the economy will struggle to grow at or above the 6.5% growth level prescribed by President Xi Jinping nudged sentiment lower, whilst inflation figures that showed consumer prices rising at 1.5%, roughly half the target of the People’s Bank of China, continued the negative feeling through the Asian session.
The selling has been limited somewhat by the PBOC’s decision to maintain the USDCNY fix at a relatively stable level today. Constant and persistent weakening of that fix last week caused investors to sell the offshore yuan, traded and settled in Hong Kong, contributing to the overall feeling that Beijing may have let too much of this genie out of the bottle.
Rand driven into the crosshairs
Things have calmed somewhat as more liquidity has come on line throughout the night. That hasn’t stopped a violent sell off in the South African rand that was down by near 10% at one point versus the USD.
Towards the end of last year the ZAR became a bit of a farce as President Zuma fired his Finance Minister to replace him with a relatively unknown civil servant. The damage was unwound somewhat as the mistake was rectified within 48 hours, but the negativity surrounding commodities, the lack of dependable electricity generation and budget issues continued the negative impetus.
As is the issue for many emerging market nations, a stronger dollar is a real concern when it comes to thoughts of debts. South Africa’s dollar funding is relatively low compared to other emerging markets, particularly those in Asia. In the short term, however, we anticipate further pain on external funding avenues and that may lead to bond yield spikes and potential downgrades to ratings.
We have seen record lows for the rand against both the USD and GBP overnight and we expect that trend will continue through the next 12 months.
Payrolls cement USD as desired currency
The dollar enjoyed a strong jobs report on Friday with the US economy growing by 292,000 positions. This handily beat expectations of a 200,000 job rise with the unemployment rate staying at 5% and the participation rate – the number of people employed or looking for a job – rose from its recent lows. In the grand scheme of things, I’d have loved to have seen some wage growth – pay rose by 2.5% vs 2.7% – but everything else about the report was exactly where the Fed would have wanted it.
Today’s data calendar is quiet