Sasfin : Forex Daily Market - Oil prices have resumed their slide this morning

Today's Talking Point

Oil Update

Analysis: Oil prices have resumed their slide this morning, following a more than 5% decline last week as the global demand outlook remains in question. Brent front-month futures have dropped below $81 per barrel, while WTI is trading near $77 per barrel when looking at the benchmark contract. Asian refiners are once again sending warning signals that the fuel markets are slumping, while US economic data generally disappointed last week. Meanwhile, timespreads are also flashing warning signs, with the level of backwardation across both futures curves narrowing since last week, speaking to easing near-term supply pressures. Brent's three-month timespread, for instance, has seen its backwardation narrow from $1.37 per barrel this time last week to 93 cents per barrel this morning. For the week ahead, focus will be on some key US jobs, growth, and inflation figures to provide insight into the possible demand outlook for the world's largest economy. Major oil producers will also be reporting their results this week while a major holiday period kicks off in China. Traders will be watching to see if fuel consumption in the Asian nation surges as travellers can take to the skies for the first Golden Week celebrations since before COVID.

Rand Update

The holiday-shortened week ahead will be a busy one, with plenty in the way of market-moving data and events packed in. Locally, the data card includes the February edition of the SARB's leading indicator on Tuesday, the March account of PPI inflation on Wednesday, and also March money supply, trade balance, and government budget balance numbers on Friday. For anyone concerned with ZAR, the trade balance print will likely be the pick of the lot, as it will provide fresh insights into the demand for the local currency stemming from cross-border flows.

However, for everyone else, the spotlight will be on former Eskom CEO Andre de Ruyter's virtual testimony in front of parliament's standing committee on public accounts. De Ruyter will be in the hot seat as he explains his allegations of ANC links to corruption and maladministration at the ailing power utility. His testimony will be of interest to all South Africans who continue to suffer severe levels of load-shedding, and may be of political importance heading into next year's national elections.

Looking externally, Q1 GDP data scheduled for release on Thursday will headline a US data card that also includes April consumer confidence prints (Tuesday and Friday), March new home sales (Tuesday), March durable goods orders (Wednesday), and also a highly-anticipated March PCE core inflation print (Friday). Elsewhere, Q1 GDP data out of Europe will be interesting, as will a Bank of Japan policy update (both on Friday).

Finally, note that major growth and tech companies will also be in focus this week as the likes of Alphabet, Microsoft, and Amazon are scheduled to announce their earnings results. These will help investors determine whether recent equity gains are justified, or whether further weakness is warranted. Should the major tech companies reporting earnings this week beat already-lowered first-quarter estimates, the US equity market's recovery will likely continue, in turn supporting broader market sentiment. Moreover, positive earnings results would also promote the outlook for the US economy and give rise to speculation supporting higher interest rates in the US.

The ZAR suffered broad-based losses on Friday, retreating against the USD, EUR, and GBP into the weekend. This unwound much of the gains it recorded earlier in the week, with the local unit remaining within its broader trading ranges against these major currencies. SA's weak growth outlook and idiosyncratic risks are preventing anything in the way of a ZAR recovery at the moment, with its bullish prospects relying almost completely on a weak outlook for other major currencies once the global monetary cycle turns. This is only expected in the second half of the year, however, with consolidatory trade expected to remain the order of the day over the near term.v

Bond Update

Bonds/Yield Curve: Some key data releases this week will likely decide whether the market continues to position for another 2-3 rate hikes or whether the economy has softened sufficiently to warrant a less hawkish SARB. The PPI data, for instance, has been retreating, and the leading indicators data points to a softening economy. Last week's retail sales data surprised to the downside, which might hold implications for weaker growth in money supply and credit extension.

So the rise in bond yields seen last week, in part on the higher-than-expected inflation data, may not extend much further. The curve has flattened, and the market moved quickly to position for a tougher SARB stance. That has changed the dynamics of the ZAR, which has become more appreciative. Although that could prompt a rethink on the outflows from the SA bond market, that reversal of trend might only turn more convicted once the consumer inflation data formally changes direction and starts to trend lower.

FRAs: FRA rates have nudged higher in the past two weeks and are now comfortably pricing in another three 25bp rate hikes. Given the recent inflation data that surprised the topside and the ZAR's reluctance to stage a strong recovery, the market is convinced that the SARB must do much more. However, at these levels, there is now a lot priced in, and it is unlikely that investors will feel comfortable pricing in even more hikes beyond another three. Already three more hikes feel like a stretch given the underlying economic dynamics and market dynamics are turning more asymmetrically in favour of lower yields to come. From these levels, some receiving interest is bound to materialise.

Repo: With a 50bp rate hike announced, the SARB has now caused a rethink in interest rate expectations. The hawkish SARB statement only further raises the possibility that the SARB may hike again at the next meeting, although it is unlikely to be by another 50bp increment. Investors have moved quickly to price in another 25bp move at the next meeting, although the inflation data and performance of the ZAR will have the final say if this unfolds. The SARB's commitment to fighting inflation has been undeniable.

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