GENERAL

Sterling falls and struggles for direction as it awaits market data

Reuters: Sterling fell slightly against the dollar on Monday and was flat against the euro, in a quiet session ahead of flash composite PMIs due on Tuesday which will give more hints on the state of the UK economy.

British Pound Sterling falls

By 11:30 GMT on Monday, the pound was down 0.1% against the dollar to $1.20320 and virtually unchanged against the euro at 88.810 pence. Data from property website Rightmove on Monday showed asking prices for British residential property rising by the smallest increase on record for that month, which normally sees a big seasonal increase. But the fact that asking prices remained flat rather than falling could be a positive signal for the housing market, suggesting a softer landing than many analysts have forecast, Rightmove said.

The market is looking ahead to the Bank of England’s next meeting in March, with an 80% chance of a 25 bps rate hike currently priced in. The bank rate stands at 4% after ten consecutive increases by the central bank since late-2021. Traders will be listening closely to speeches from Monetary Policy Committee members Sam Woods and Catherine Mann this week for hints over the BoE’s next move as it battles to bring down inflation. Focus also remains on hints of progress toward a potential deal to revise the Northern Ireland protocol, but the news so far has had little impact on the pound, according to ING FX analysts.

“Here, eurosceptics in the Conservative party, including former PM Boris Johnson, will try to thwart any progress. And Sunak will be reluctant to have to rely on opposition Labour votes to win progress in parliament,” said ING FX analyst Chris Turner in a note. Turner points instead to monetary policy as the main driver for sterling, expecting “EUR/GBP to stay range-bound and GBP/USD to be bounced around by the dollar trend.”

US Dollar

Reuters: The South African rand weakened against the dollar on Monday, at the start of a week in which fiscal policy will be in focus, with the finance minister due to present this year’s budget. At 15:36 GMT, the rand traded at 18.1225 per dollar, 0.47% weaker than its previous close. The U.S. dollar index, which measures the dollar against six other major currencies, slipped over 0.1%, inching down from a six-week high hit on Friday after a flurry of economic data reinforced market expectations of tighter monetary policy from the Federal Reserve. Finance Minister Enoch Godongwana will deliver his 2023 budget speech on Wednesday.

As well as presenting updated revenue, expenditure and economic growth forecasts, he is expected to outline a plan for the government to take on part of the debt of struggling state power utility Eskom. The chief executive of state power utility, Andre de Ruyter, said on Monday record “Stage 6” outages, involving 10 hours daily without power, were expected to last until the peak hours late on Wednesday. Eskom has implemented power cuts every day this year, following 2022 when it had the highest number of days with outages. Also this week, global watchdog the Financial Action Task Force (FATF), which sets standards on combating money laundering and illicit financing, could add South Africa to its “grey list” at meetings scheduled to happen in Paris.

Being added to that list would be a reputational knock for South Africa and could hurt local asset prices, as grey-listed countries are subject to greater monitoring by the FATF on concern that they are at higher risk for money laundering and terrorist financing. On the stock market, the Top-40 and the broader all-share closed around 0.7% higher, helped by gains in the resources index. However, shares in Anglo American Platinum (Amplats) fell almost 2% to the bottom of the Top-40 index after the platinum group metals (PGM) miner reported a 38% fall in annual profit and said power cuts could dent output this year. The government’s benchmark 2030 bond was weaker in afternoon deals, with the yield up 7.5 basis points at 10.190%.

South African Rand

Reuters: The South African rand weakened against the dollar on Monday, at the start of a week in which fiscal policy will be in focus, with the finance minister due to present this year’s budget. At 15:36 GMT, the rand traded at 18.1225 per dollar, 0.47% weaker than its previous close. The U.S. dollar index, which measures the dollar against six other major currencies, slipped over 0.1%, inching down from a six-week high hit on Friday after a flurry of economic data reinforced market expectations of tighter monetary policy from the Federal Reserve. Finance Minister Enoch Godongwana will deliver his 2023 budget speech on Wednesday.

As well as presenting updated revenue, expenditure and economic growth forecasts, he is expected to outline a plan for the government to take on part of the debt of struggling state power utility Eskom. The chief executive of state power utility, Andre de Ruyter, said on Monday record “Stage 6” outages, involving 10 hours daily without power, were expected to last until the peak hours late on Wednesday. Eskom has implemented power cuts every day this year, following 2022 when it had the highest number of days with outages. Also this week, global watchdog the Financial Action Task Force (FATF), which sets standards on combating money laundering and illicit financing, could add South Africa to its “grey list” at meetings scheduled to happen in Paris.

Being added to that list would be a reputational knock for South Africa and could hurt local asset prices, as grey-listed countries are subject to greater monitoring by the FATF on concern that they are at higher risk for money laundering and terrorist financing. On the stock market, the Top-40 and the broader all-share closed around 0.7% higher, helped by gains in the resources index. However, shares in Anglo American Platinum (Amplats) fell almost 2% to the bottom of the Top-40 index after the platinum group metals (PGM) miner reported a 38% fall in annual profit and said power cuts could dent output this year. The government’s benchmark 2030 bond was weaker in afternoon deals, with the yield up 7.5 basis points at 10.190%.

World Markets

Reuters: Global shares inched up on Monday as a U.S. holiday tempered volatility ahead of minutes of the latest Federal Reserve meeting even though data on core inflation has raised the risk of interest rates heading higher for longer. The dollar, which is this month on track for its largest one-month rise since September, eased a touch, reflecting a retreat in risk aversion among investors. With U.S. markets shut for the Presidents’ Day holiday, non-U.S. assets got some respite from the relentless pressure of last week. The MSCI All-World index rose 0.2%, helped by modest gains in Europe, where the STOXX 600 rose 0.1%, as gains in mining shares offset a decline in the tech sector. A surge higher in both stock and bond prices in the first six weeks of the year came to a screeching halt, after a flurry of U.S. data suggested the world’s largest economy is holding up far better than expected, which means interest rates will have to rise further and take far longer to decline. “Until recently, the market debate was all about soft-landing or hard-landing, recession or no recession. However, the real world is now not playing ball, prompting investors to come up with the idea of ‘no-landing’ at all,” Kingswood chief economist Rupert Thompson said.

“This new concept of ‘no-landing’ is not really that helpful, not least because, as any airline pilot will testify, there is ultimately either a soft or hard landing. Arguably, the day of reckoning has just been postponed until the second half of the year with any U.S. recession now looking more likely to occur then, if one occurs at all,” he said. Having dismissed warnings from U.S. policymakers that inflation is too high and too persistent for comfort, investors are starting to accept they may have been overly optimistic in their assumptions. Money markets show investors expect U.S. rates to peak at around 5.3% by July, with a quarter-point rate cut possibly materialising by December. This marks a massive shift from expectations at the start of February for a peak below 5% by July and the first rate cut coming in just weeks later. “It might be premature to believe that recession is off the table now, when Fed will have done 500bp+ of tightening in a year, and the impact of monetary policy tended to be felt with a lag on the real economy, of as much as 1-2 years,” JPMorgan head of global and European equity strategy Mislav Matejka said.

“The damage has been done, and the fallout is likely still ahead of us,” he said. S&P 500 and Nasdaq futures fell 0.2-0.3%. The S&P touched a two-week low on Friday. “It’s the most aggressive Fed tightening in decades and U.S. retail sales are at all-time highs; unemployment at 43-year lows; payrolls up over 500k in January and CPI/PPI inflation reaccelerating,” analysts at BofA noted. “That’s a Fed mission very much unaccomplished.” The release on Wednesday of the minutes of the Fed’s latest meeting may offer more insight into policymakers’ deliberations, but could have less impact than usual because the meeting took place after January’s bumper payrolls and retail sales reports. In addition, the Fed’s preferred measure of inflation, the core personal consumption expenditures index (PCE), lands on Friday. It is expected to haven risen by 0.4% in January, the biggest gain in five months, while the annual pace is forecast to have slowed to 4.3%. The dollar nudged lower against a basket of major currencies, but was noticeably down against so-called commodity currencies, including the Australian dollar, which rose 0.5% and the Canadian dollar, which gained 0.1%.

Brent crude futures, which last week shed nearly 4%, rose 0.9% to $83.74 a barrel, while copper gained 1.7% to trade around $9,143 a tonne. Both are highly sensitive to the health of the Chinese economy, which is resuming more normal activity after three years of COVID lockdowns. China’s offshore yuan rose 0.1% to around 6.865 to the dollar after Beijing kept interest rates steady as expected, having poured liquidity into the banking system in recent days. The earnings season continues this week with major retailers Walmart and Home Depot set to offer updates on the health of the consumer.

Published by the Mercury Team on 21 February 2023

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