Research – 29 July 2019
Lester Davids, Unum Trading Desk
On Friday just after the market close, South Africa was dealt another blow as Ratings Agency Fitch cut their outlook on the economy to negative (from stable) affirming the junk BB+ rating on the country’s foreign- and local-currency debt. This decision comes on the back of a“marked widening in the budget deficit as a result of lower GDP growth and increased spending, including state-owned enterprise support”. In addition, Treasury’s announcement that power utility Eskom would be supported with an additional R59bn is a move which is seen by the rating’s agency as ‘credit negative’. The extra money for Eskom will widen the budget deficit for this fiscal year to 6.3% of gross domestic product, compared with the 4.5% of GDP the government projected in February, Fitch said. The announcement was reflected in the currency which had weakened from midday but had also lost ground from Thursday, when it broke back above the psychological 14.00 level versus the US Dollar (R14.28 this morning). This helped support rand hedge shares while local facing sectors such as banks and retailers came under significant pressure.
In the US, the S&P 500, Nasdaq notch fresh highs as GDP exceeded forecasts. Wall Street closed in the green on Friday 26 July 2019, after data showed the US economy grew by an annualized 2.1% in the second quarter, beating market expectations of 1.8%, as investors look ahead to the Fed’s monetary policy meeting next week, as well as US-China trade negotiations. In addition, stronger-than-expected quarterly results from Alphabet (+10.5%), Twitter (+9.7%) and Starbucks (+8.9%) supported sentiment. The Dow Jones gained 52 points or 0.2%. The S&P 500 climbed 22 points or 0.7%. The Nasdaq jumped 92 points or 1.1%. – TradingEconomics.com
In the UK, the FTSE 100 surged 60 points, or 0.8% to 7,549 on Friday, on the back of a weaker pound and boosted by Vodafone and Pearson shares. The telecom company surged 10.6% to its highest level since March after announced plans to set up a separate business for its European mobile telecommunication mast operations with IPO potential and the education group climbed 5.6% on robust first-half trading. Meanwhile, other major European stocks finished mixed: the DAX 30 rose 58 points, or 0.5% to 12,420 and the CAC 40 gained 32 points, or 0.6% to 5,610 after the information technology Sopra Steria Group raised its organic revenue target for 2019. On the other hand, the FTSES MIB fell 66 points, or 0.3% to 21,838 and the IBEX 35 went down 65 points, or 0.7% to 9,226, dragged by bank shares after CaixaBank and Banco de Sabadell reported worse than expected earnings results and cut the outlook for their core revenue on the back of lower interest rates in the Eurozone. TradingEconomics.com
Central banks in the US, UK and Japan will be deciding on monetary policy next week, with markets anticipating a 25bps rate cut from the Fed. Other important releases include: US jobs report, trade balance, personal income and outlays, ISM Manufacturing PMI, construction spending and factory orders; UK Gfk consumer confidence, Markit Manufacturing and Construction PMIs; Eurozone Q2 GDP growth, inflation rate, business survey; Germany GfK consumer confidence, jobless data and retail sales; Japan consumer confidence, retail sales, unemployment, industrial production; China NBS PMIs and Caixin Manufacturing PMI; and Australia Q2 inflation rate, private sector credit and retail trade. Investors will also react to US-China trade talks.
The Federal Reserve will probably cut interest rates by 25bps when it meets on Wednesday, amid global growth concerns and muted inflation pressures as trade tensions continue to weigh on exports and manufacturing. Regarding the US economic calendar, notable publications are nonfarm payrolls, foreign trade balance, personal income and outlays, ISM Manufacturing PMI, construction spending, factory orders, Case-Shiller home prices, pending home sales, Q2 employment costs, Dallas Fed Manufacturing Index, Chicago PMI and the final readings of Michigan consumer sentiment and Markit Manufacturing PMI.
Trade talks will also be keenly watched, as top US and Chinese negotiators meet in Beijing for the first time since presidents Donald Trump and Xi Jinping agreed to restart talks.
Other key data for America include: Canada trade balance; Mexico preliminary reading of Q2 GDP growth, business confidence and unemployment; Brazil jobless rate, industrial output and trade balance. The Central Bank of Brazil will be deciding on monetary policy.
In the UK investors turn their attention to the Bank of England’s policy meeting, at which policymakers are expected to keep rates on hold. Inflation remains in line with the 2 percent target while fears of a no-deal Brexit mount after Boris Johnson became the new prime minister. Investors will also keep an eye on Markit PMIs for the manufacturing and construction sectors, Gfk consumer confidence, Nationwide house prices and Bank of England’s monetary indicators.
Elsewhere in Europe, flash estimates of the Eurozone second-quarter GDP growth rate will most likely show a slowdown in the bloc’s economy while inflation is seen falling to near 1-1/2-year low in July. Other key economic data include: Euro Area business survey, unemployment rate and retail trade; Germany GfK consumer confidence, jobless data and retail sales; France, Spain and Italy preliminary second-quarter GDP growth rates; Turkey economic confidence and foreign trade; and Switzerland KOF leading indicators and inflation rate.
The Bank of Japan will hold its monetary policy meeting, but no changes are expected. Elsewhere, investors will be waiting for consumer confidence, retail sales, unemployment, industrial production, housing starts and the final Jibun Bank Manufacturing PMI. In China, the NBS manufacturing and non-manufacturing PMIs and Caixin Manufacturing PMI will probably point to a further contraction in factory activity during July while the service sector is seen growing. Meanwhile, in Australia investors will focus on Q2 consumer and producer prices, with forecasts pointing to an increase in inflation from a two-and-half year low. Other releases include private sector credit, retail trade, AIG and CommBank manufacturing PMIs, HIA new home sales and building permits.
Other highlights for the Asia-Pacific region include: India Markit Manufacturing PMI; Hong Kong and Taiwan Q2 GDP growth rates; South Korea business confidence, retail sales, industrial production, inflation and trade balance; Indonesia inflation rate; and Malaysia trade balance. TradingEconomics.com
Technical Insights and Strategies
|1||All Country World Equity Index -EX USA ETF (VEU) vs iShares South Africa ETF (EZA): US Equities have been a leader however a look at the EX-USA ETF sees South Africa (EZA) having under-performed even without the US weighting. Last week we saw the relative chart print a bullish engulfing candle with an attempt to break above the consolidation range and downward trend line place since October 2018.
|2||United States 10 Year Bond Yield: The weekly chart has caught my attention with the price having found continuous support at the September 2017 swing lows, while the RSI attempts to move up from an oversold level. This week’s Federal Reserve FOMC announcement will be closely watched with potential impact on the related instrument.||https://invst.ly/bfmaz|
|3||US Dollar / South African Rand: Following the formation of the ‘Falling Wedge’ pattern, we saw the price break to the upside with strong candle structure which has seen the pair close the week above a rising 20-day exponential moving average and just below the 50-day Exponential Moving Average and 200-day Simple Moving Averages.||https://www.tradingview.com/x/QLH9MN5F/|
|4||South Africa 10 Year Bond Yield: Monthly Chart: Last week South African Bonds experienced what appears to be large selling pressure, with yields on the 10-Year rising from 8.67% at Monday’s open to 9.05% by Friday’s close. A look at the monthly chart sees the price testing an 11-year downward trend line while the price is holding above an upward sloping 50-month moving average. Should we see the 9.60% level being breached and turn into a support zone, this may open up further upside and imply that the sellers have gained control.||https://www.tradingview.com/x/z8Eh7RQj/|
|5||JSE Banks vs ZARUSD Relative Performance:
The weekly chart attached contains three elements:
1. JSE Banks Index vs ZARUSD (Dollar Rand Inverse) Relative Chart:
2. JSE Banks Index (J835)
3. US Dollar / South African Rand (Inverse)
The analysis of this chart highlights that over the last few years we have seen that despite Rand weakness, the JSE Banking Index out-performed. This is highlighted due to the fact that traditionally a weak local currency is considered negative for local facing shares however in the aftermath of the Global Financial Crisis, selected Emerging Markets saw become relatively attractive due to their higher yields. SA banks in particular has always been considered well-run with sufficient capital levels. Now we are starting to see SA Banks under-perform the local currency with a bearish candle structure and a breach of an 8- year trend line.
|6||JSE Financials (J212) vs All Share Index (J203): Financial sector shares continue to trend lower versus the All Share. The neckline of the Head and Shoulder formation has been breached with the price trading below a downward trending 20 and 50-day exponential moving average.||https://www.tradingview.com/x/7vAFX7gS/|
|7||JSE Banks vs JSE Retailers: Monthly Chart – On a relative basis, we note that the JSE Banking Index (J835) is trading at a 10 and 1/2 year high versus the General Retailer Index (J835). The current candle structure sees a bearish engulfing being developed while the Relative Strength Index has not confirmed the new multi-year highs.||https://www.tradingview.com/x/uEDZ8FWj/|
|8||JSE Retailer Index (J537): Monthly chart double top formation has started to see a breakdown of the 6291 support zone while the RSI reading of 40 also remains weak.||https://www.tradingview.com/x/1qmhmFLH/|
|9||Shoprite Holdings (SHP): Long Term Technical View: Traditionally, RSI readings above 70 is often seen as ‘overbought’ while below 30 suggests oversold. However in some cases, a share can remain in overbought territory for an extended period of time while the price continues to gain. One such example is Shoprite where the RSI traded above 70 in October 2004 trading in the ‘overbought’ zone until December 2007 while the price increased from 1150c to 4300c (a 273% increase). Currently, the Monthly RSI trades at 36, having breached support of 40 in December 2018. Does this mean it is ‘oversold’ or is it a weak price trend? Based on the monthly chart, I am leaning toward the latter. Just as the price remained in overbought territory previous, so too can the price remain weak as the RSI trades with a weak bias. There are of course opportunities to trade (both long and short) based on the short and medium term charts. Provisionally, the major long term support zone is 126/130.||https://www.tradingview.com/x/IKgO4oF3/|
|10||Pick n Pay (PIK): Breaking a 16-year incline support. LT Risk.||https://www.tradingview.com/x/6PnxfxLk/|
|11||Discovery Holdings (DSY): Valuing The Bigger Picture – The Importance Of Monthly Charts. With the enthusiasm around the long term growth story (DSY Bank, China etc) it may be tough being a fundamental bear on this innovative , high growth insurer which has been led by superb management. Looking at the monthly though, the we have seen a sharp pullback off the multi-year highs. For those who have been following our research, the long term technical warning signs started flashing in back in November 2018 at 16106c, the big breakdown level. Since then we have seen a gradual downward trend with the long term technical targets remaining R124 and R108. In the short term, the sell-off from the 155 level to just below 130 may entice short term speculators to catch a rebound. On the fundamental front, the new around the implementation of the NHI saw DSY take a massive knock on Friday (-3.29%).
|12||Sappi: Trader could look to accumulate on a pullback. Would like to see the price hold the 5190/5240 level.||https://www.tradingview.com/x/cg69ipCt/|
|13||Mondi plc: The share price is currently breaching the downward trend line resistance break. Medium Term Long Bias.||https://www.tradingview.com/x/u53kkrsU/|
|14||British American Tobacco plc: The share price is attempting to break downward trend line resistance going back to August 2018. Medium Term Long Bias.||https://www.tradingview.com/x/KOqQKiK9/|
|15||Richemont: Our last call on CFR was a buy/long on 04-Dec at around 9000c. Since then, we have seen the price gradually tick higher with another accumulation opportunity in May just below 10000c. Lately I have been scratching my head on the share, as we have until recently seen the Rand being resilient while the share price has continued to move higher. With the ZAR having come under significant pressure late last week, we have seen CFR close just below 12500c. Looking at the weekly chart, the momentum remains to the upside, with the price over the medium and long term potentially set to test the channel in place since December 2012. In the short term, I continue to monitor the price as it potentially makes it way up to swing highs of Oct/Nov 2017 and September 2018 around R133. Any potential trade idea on the share will be communicated.||https://www.tradingview.com/x/SsEqiIn4/|
|16||Iron Ore vs Copper (Relative): One a relative basis, it’s been a runaway for IO vs Copper since March of this year. The price has close the ‘gap’ however we now see the price at overhead swing highs with the candle structure suggesting the potential commencement of a bearish reversal. RSI at 83, the highest level in over 8 years.||https://www.tradingview.com/x/YpBDweQo/|
|17||Ubisoft Entertainment (Mkt Cap: EUR7.6bn) This weekend we saw the final of the Fortnite World Cup where the winner will take home a whopping US$3m ($42.8m). Without taking a deep dive, we know that gaming has taken of massively with companies such as Activision Blizzard, Electronic Arts and Take Two Interactive being some of the major beneficiaries. In terms of consoles, we have Sony, as well as Nintendo. Over In Europe, Ubisoft Entertainment is a French video game company headquartered in Montreuil with several development studios across the world. It publishes games for several video game franchises, including Assassin’s Creed, Far Cry, Just Dance, Prince of Persia, Rayman, Raving Rabbids, and Tom Clancy’s.
Technically, it could be a decent long term setup with the price looking to break up from it’s consolidation range that has been in place for just over 1 year. One to consider for a longer term offshore equity portfolio.
|18||(Offshore) Fatfetch Ltd: Farfetch is an online luxury fashion retail platform that sells products from over 700 boutiques and brands from around the world. Back in February we saw the company also partner with Burberry. Listed on the NYSE with a market cap of $6.5bn, the technical setup is similar to the one we saw in February at the time of the announcement. Key technical drivers: 5-month bear trend line break, price back above upward sloping short term MA’s, RSI pointing up with a steady 60 print. Long Bias. Last Close: $22.00.||https://www.tradingview.com/x/Gp0orO10/|
|19||(Offshore) Pandora A/S (Denmark): Equity Portfolio Medium Term Recover Play. Need to see support around 250 to remain positive. 14-month downward trend line breached. Last Close: DKK268||https://www.tradingview.com/x/iuQjUotz/|
|20||Offshore: H&M: Coming into 2019, I expected H&M to start making a recovery following a multi-year recovery. Since January the price has performed strong on the back of an improvement in results, while strong support has seen the share rise from the mid-130s to just above SEK170. The share has also been forming a base and is currently trading at the top of the range however is still well off it’s multi-year highs of around SEK365. Long Bias||https://www.tradingview.com/x/WNG5XF1Q/|
|21||Boeing Co (BA): Range Trading Opportunity. Buy 330/Sell 348||https://www.tradingview.com/x/i2YM6Rye/|
|22||US 10 Year – US 3 Month Bond Spread vs S&P 500: Please See Chart.||https://www.tradingview.com/x/C03S8Yzx/|
“Gold Sentiment” Dropping Faster Than Gold
Gold Commitment Of Traders (COT) Positioning: Speculative Longs – The highest since 26 September 2016.
Volatility Seasonality: Over a 20-year period July has historically seen a rise in Volatility.