Financial Matters: Rand softer as market awaits Zuma’s speech

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THE rand gave back some of the previous day’s gains yesterday as investors fretted about whether President Jacob Zuma would hit the right notes in a speech on the state of the economy.

Financial Matters by fin24/IOL

Zuma was scheduled to deliver his statement to parliament by end of day yesterday, against the backdrop of waning economic growth and uncertainty over fiscal policy after he fired the finance minister in December.

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In morning trade, the rand traded at 15,9150 to the US dollar, down slightly from Wednesday’s New York at 15,8950.

The rand had rallied to 15,7650 in the previous session after the United States Federal Reserve left some investors betting that the next US rate hike might be a while; a plus for riskier, but high yielding emerging market currencies.

The rand, however, remains on shaky ground after shedding a quarter of its value against the greenback last year, its decline accelerating in December after a cabinet reshuffle in which Zuma changed finance ministers twice in less than a week.

Ratings agencies have warned of a downgrade for Africa’s most industrialised economy should signs start emerging of a shift from relatively prudent fiscal policies.

“President Zuma’s state of the nation address tonight is key,” Barclays Africa said in a note.

On the stock market, the Top-40 index was down 0,6% while the broader all-share slipped 0,34 in early trade. Government bonds however held firm and the yield for the benchmark instrument due in 2026 eased three basis points to 9,185%.

Meanwhile, gold rallied above US$1 200 an ounce after Federal Reserve chair Janet Yellen signalled that the US central bank may delay further interest rate rises should the turmoil in global markets continue, burnishing the investment case for the metal that has been the best performing commodity in 2016.

Bullion for immediate delivery gained as much as 1,5% to US$1 214,64 an ounce, the highest level since May 22, according to Bloomberg generic pricing. The metal, which traded at US$1 206,39 earlier yesterday in Singapore, is heading for a ninth gain in 10 days. Miners’ shares jumped.

Gold has surged 14% this year as the turmoil sweeping across financial markets stoked demand for haven assets, with weakness in China’s economy and currency spurring concern. Yellen said on Wednesday that the turbulence had tightened financial conditions by pushing down stock prices and raising some borrowing costs. A Bloomberg gauge of the US currency has fallen 1,2% in 2016 after gaining for three years.

Yellen’s “more cautious tone and emphasis on a more elevated global risk profile, with particular focus on China, suggests the future path of interest rate hikes will remain very much a gradual one”, said Mark Keenan, head of commodities research for Asia at Societe Generale SA in Singapore. “Gold’s move higher was intuitive and well-supported by physical inflows” into exchange-traded products. Investors have poured funds into gold-backed exchange trade products (ETPs) this year as the outlook for higher US rates has shifted, and as concerns have increased about the potential for further turmoil in emerging markets, especially weakness in the yuan.

Kyle Bass, the hedge fund manager who successfully bet against mortgages during the subprime crisis, said there is scope for a significant devaluation of the Chinese currency.

The holdings in ETPs rose 0,5% to 1 571,3 metric tonnes on Wednesday, the highest level since July, according to data compiled by Bloomberg. Since the start of 2016, the assets have expanded 7,5% following three straight years of losses.

Futures traders, who at the end of last year predicted a more than 50% chance of a rate rise in March, now see less than 30% odds borrowing costs will increase this year. Higher rates tend to hurt bullion as the metal does not pay interest like assets such as bonds. Goldman Sachs Group said this week in a report issued before Yellen’s remarks that the bank still saw bullion dropping to about US$1 000 as the Fed would hike three times in 2016.

“It seems as though people are flooding to safe-haven assets,” Wayne Gordon, executive director for commodities and forex at UBS Wealth Management, said in a TV interview yesterday.

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