Unum Capital Trading Desk Research 05-Aug-2019

Unum Capital Trading Desk Research 05-Aug-2019

Research – 05 August 2019

Lester Davids, Unum Trading Desk

Market Overview  

South African equities ended the week lower, with the All Share Index declining by 2.25% while the Top 40 was weaker by 2.31% (or 1296 points). Of the major movers last week, Sappi shed 16.6%, Massmart by a similar 16% while Mondi Plc found itself 10% in the red. Bucking the trend was RCL Foods with a 12% gain, while Harmony Gold, Anglogold Ashanti and Shoprite added 10.36%, 6.93% and 6.38% respectively. In a big move, the Rand lost 3.42% versus the US Dollar adding to the prior week’s loss of 2.51% as concerns over the country’s growth, financial stability and credit rating escalate. Out of interest, a check of South Africa’s 5 year credit default swap (CDS) sees the following: The South Africa 5 Years CDS value is 184.91 (last update: 2 Aug 2019 22:00 GMT+0). This value reveals a 3.08% implied probability of default, on a 40% recovery rate supposed. CDS value changed +8.56% during last week, +14.06% during last month, -2.49% during last year. (source: http://www.worldgovernmentbonds.com/cds-historical-data/south-africa/5-years/).     

This week the US will be publishing ISM Non-Manufacturing PMI, JOLTs job openings, and producer prices; UK Q2 GDP growth, business investment, foreign trade, manufacturing and construction output; Germany factory orders and trade balance; China trade figures, consumer and producer prices, and Caixin Services PMI; Japan, Indonesia and the Philippines Q2 GDP growth rates; and Australia trade balance. Investors will also react to central bank policy meetings in Australia, New Zealand and India.

In the US, the ISM Non-Manufacturing PMI will probably pick up from the previous month’s two-year low as business activity is seen growing at slightly faster pace in July. Other notable publications are JOLTs job openings, producer prices, IBD/TIPP economic optimism, total vehicle sales, government’s budget statement, and and the final readings of Markit Services PMI and wholesale inventories.

Investors will also be expecting any further developments on trade negotiations, after tensions escalated between Washington and Beijing following the President Trump’s threat to impose a 10% tariff on $300 billion of Chinese goods from September 1st.

The UK will publish its preliminary estimate of second-quarter GDP growth, alongside business investment, trade balance, manufacturing and construction output. Market forecasts point to stagnation, which would be the economy’s worst performance since the last quarter of 2012, as Brexit and political uncertainty bites. Elsewhere in Europe, the Eurozone, Germany and France will publish final figures for Markit Services PMI, while Italy and Spain are releasing flash estimates. Other key data include: Germany factory orders, industrial production and trade balance; France trade data and industrial output; Switzerland consumer survey and retail sales; and Turkey inflation rate.

All eyes are on China’s trade balance, with markets expecting a 2.2 percent fall in exports and a 7.6 percent plunge in imports amid ongoing trade tensions with the US. The country will also be releasing its Caixin Composite and Services PMIs, consumer and producer inflation. Consumer prices will probably rise 2.7 percent, the same pace as in June, while producer prices should fall back into deflationary territory.

In Japan, the preliminary estimate of second-quarter GDP will be keenly watched, with traders anticipating a sharp slowdown in economic growth on the back of weak external demand. Other important releases include: final Jibun Bank Services and Composite PMIs, Eco Watchers Survey, leading and coincident indexes, and household spending.

Central banks in India and New Zealand are expected to cut benchmark interest rates by 25bps next week, while the Reserve Bank of Australia will most likely leave monetary policy unchanged. Key data for Australia are final CommBank Composite and Services PMIs, AIG services and construction indexes, trade balance, current account, home loans and ANZ job advertisements. Other highlights for the Asia-Pacific region include: New Zealand Q2 unemployment rate; India Nikkei Services PMI; Indonesia Q2 GDP growth and business confidence; Thailand interest rate decision; the Philippines Q2 GDP growth, inflation, trade balance and interest rate decision; and Hong Kong Markit PMI. – TradingEconomics.com

Technical Insights and Strategies
US Dollar Index: Despite the US Federal Reserve cutting interest rates by 25bps, the comments around further reductions was interpreted by global markets as Hawkish. This saw the US Dollar surge, testing a multi-month high of 98.93 by the close of trading on Friday. Consistent with my long-held view of US Dollar out-performance, a look at the monthly chart sees the index having breached the trend line resistance of the February 1986 peak when the index tested 164 points. In March 2015 we saw a breakout, followed by a multi-year re-test. During January 2018, a rally ensued with a rally from 88 to the current level of 98. Monthly chart: https://invst.ly/bj7uq

Daily chart: Pullback in an upward trend. Watch incline support at 97.40/97.65. https://www.tradingview.com/x/lGGRew3N/      

All Country World Equity Index: This past week, global equities, as measured by the iShares MSCI All Counyry World Equity ETF, fell by 3.14% and closing on the incline support trend line going back to the 24-December-2018 lows. This close also coincides with the incline support that extends to the March 2009 global financial crisis lows. A break and close below this level could signal a medium as well as long term change in trend. On the upside, $75.34 is a major resistance zone, while the first strong support comes in at the $69.96 level.


iShares MSCI Emerging Market Index relative to the US Dollar Index: The December 2015 trend line support has failed to hold and has now turned into resistance with the price rolling over. Long term term target is the incline support going back to mid-2004. https://www.tradingview.com/x/dhSnAkNl/
The South African Equity Market vs the broader Emerging Market basket: The price continues to 4 1/2 year downward channel with the last 11 month seeing the JSE (in US$) hovering around 11-year lows. The price is trading below the longer term 50-month moving average and below a downward trending 20-month exponential moving average. https://www.tradingview.com/x/wPS1Rxth/  
JXY – Japanese Yen Currency Index: It’s risk off and the Yen surges. Back in May we highlighted this chart at 91, As we approach 94, the Yen trades at a 16-month high reflective of the risk-off and safe-haven refuge globally. https://www.tradingview.com/x/4RjohkGe/
BXY – British Pound Currency Index: A look at the Commitment of Traders (COT) positioning sees Large Speculators being the most net short since May 2017 (28 months). At the same time, Commercials are the most net long over the same period. https://imgur.com/Rzs944N 
JSE Top 40 Spot: Price has broken down from the bear flag formation and is approaching support levels which is in line with the 200-day moving average. Please see chart for potential short term accumulation levels. https://www.tradingview.com/x/zT1OfrTv/  
US Dollar / South African Rand:  

Daily ( https://www.tradingview.com/x/ogl8qS8q/)  

Weekly: ( https://www.tradingview.com/x/D5LxxtbK/)

Monthly: ( https://invst.ly/bj7gt )



Naspers: ( https://www.tradingview.com/x/ZpWHe4Y0/)

Tencent Stake on the chart: ( https://www.tradingview.com/x/VVEhewNU/)   

Firstrand: For those (with a trading time frame) looking to accumulate, the share has broken the Dec-2015 incline support as per the weekly chart. Watch the 200-wek at R56.06 down to R54.60. On the longer time frame and fundamental basis, FSR trades at 12x earnings. That seems pricey in context of the economic backdrop, not to mention Aldermore in the UK (Brexit). It’s also trades at a premium versus it’s Big 4 peers. This is how I see the LT chart: We can see a shift back into the 1997 channel. RSI breaking down. MACD bearish divergence. (https://invst.ly/bi9yo)    

Richemont: A very weak ZAR (and good results from it’s peers) is for now keeping me from all a short on CFR. I do however notice that the share is trading around 2x 200-day standard deviation. If ZAR blows out we are going to see the rising wedge break to the upside, with the share targeting higher levels. For now, higher lows remain in place with the incline support going back to 15 May still holding. Should we see the incline lose support, it may signal short term weakness and a short/sell opportunity.  https://www.tradingview.com/x/WX896erK/

Capitec Bank (CPI): Long term analysis – An analysis of the monthly chart sees the price making a significant long term shift by losing support of a 16-year trend line support. Relative to the share’s 50-month moving average, the price trades 36% above this level. Relative to the All Share Index we have started to see a long term ‘roll-over’ while versus the J212 (Financial 15 Index) the price is turning lower. https://www.tradingview.com/x/SDoFM0ih/
JSE Ltd: Big support level at 115/118. https://www.tradingview.com/x/So6ReoE5/
Brent Crude Oil: Monthly View. Price approaching January 2016 incline support trend line and 50-month moving average. https://www.tradingview.com/x/f30WRaR3/  
Palladium: Watch the RSI breaking incline support on weekly chart. Price also at rising resistance. https://www.tradingview.com/x/uCQojg15/   
S&P 500 vs ISM Manufacturing PMI https://www.tradingview.com/x/knWH2s2J/

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