- Rand’s Slide Is Tempered by Yield Chasers Unfazed by Zuma’s Win
South Africa’s President Jacob Zuma is staying put — but the rand’s muted reaction suggests investors are still finding the country’s yields tempting enough to look past the damage he can do to the nation’s economy.
Zuma survived a bid by some party leaders to remove him from office, putting an end to optimism that helped boost the rand last week by the most since March. While the currency gave up some of those gains on Monday, the one-month forward implied yield — the predicted return based on current yields — was near the highest since January.
The flow of money into high-yielding emerging markets is aiding the rand even as political risks stack up, according to Barclays Plc. Investors poured a net 5.3 billion rand ($409 million) into South African government bonds last week as they chase some of the highest yields in emerging markets.
“There’s a wall of money out there that continues to be flooding into emerging-market assets, looking for carry in a low-volatility environment,” Mitul Kotecha, the head of Asia currency and rates strategy at Barclays in Singapore, said in an interview with Bloomberg TV. Flows into emerging-market assets persist “despite this sort of news that you’d think would have the opposite impact on the currency,” he said, referring to Zuma’s win.
The president was under pressure to quit following his decision on March 31 to fire Pravin Gordhan as finance minister in a cabinet reshuffle, a move that sparked public protests and cost the country its investment-grade credit rating.
The rand fell 0.4 percent to 12.9269 per dollar as of 12:12 p.m. in Johannesburg, reversing gains of as much as 1.7 percent. That trims the currency’s advance this month to 3.4 percent, which is among the highest in emerging markets. The rand’s one-month forward implied yield climbed to 7.88 percent on Friday, the highest level since January. It slipped three basis points on Monday.
Meanwhile, the yield on the government’s rand bonds due 2026 climbed seven basis points to 8.57 percent, paring its decline in May to 13 basis points. The FTSE/JSE Africa All Share Index fell 0.2 percent, extending its losing streak to a fourth day.
Oil Prices Recover Slightly Amidst Demand Concerns in U.S. and China
Oil Prices Continue Slide as Market Skepticism Grows Over OPEC+ Cuts
Global oil markets witnessed a continued decline on Wednesday as investors assessed the impact of extended OPEC+ cuts against a backdrop of diminishing demand prospects in China.
Brent crude oil, the international benchmark for Nigerian crude oil, declined by 63 cents to $76.57 a barrel while U.S. WTI crude oil lost 58 cents to $71.74 a barrel.
Last week, the Organization of the Petroleum Exporting Countries and its allies, collectively known as OPEC+, agreed to maintain voluntary output cuts of approximately 2.2 million barrels per day through the first quarter of 2024.
Despite this effort to tighten supply, market sentiment remains unresponsive.
“The decision to further reduce output from January failed to stimulate the market, and the recent, seemingly coordinated, assurances from Saudi Arabia and Russia to extend the constraints beyond 1Q 2024 or even deepen the cuts if needed have also fallen to deaf ears,” noted PVM analyst Tamas Varga.
Adding to the unease, Saudi Arabia’s decision to cut its official selling price (OSP) for flagship Arab Light to Asia in January for the first time in seven months raises concerns about the struggling demand for oil.
Amid the market turmoil, concerns over China’s economic health cast a shadow, potentially limiting fuel demand in the world’s second-largest oil consumer.
Moody’s recent decision to lower China’s A1 rating outlook from stable to negative further contributes to the apprehension.
Analysts will closely watch China’s preliminary trade data, including crude oil import figures, set to be released on Thursday.
The outcome will provide insights into the trajectory of China’s refinery runs, with expectations leaning towards a decline in November.
Russian President Vladimir Putin’s diplomatic visit to the United Arab Emirates and Saudi Arabia has added an extra layer of complexity to the oil market dynamics.
Discussions centered around the cooperation between Russia, the UAE, and OPEC+ in major oil and gas projects, highlighting the intricate geopolitical factors influencing oil prices.
U.S. Crude Production Hits Another Record, Posing Challenges for OPEC
U.S. crude oil production reached a new record in September, surging by 224,000 barrels per day to 13.24 million barrels per day.
The U.S. Energy Information Administration reported a consecutive monthly increase, adding 342,000 barrels per day over the previous three months, marking an annualized growth rate of 11%.
The surge in domestic production has led to a buildup of crude inventories and a softening of prices, challenging OPEC⁺ efforts to stabilize the market.
Despite a decrease in the number of active drilling rigs over the past year, U.S. production continues to rise.
This growth is attributed to enhanced drilling efficiency, with producers focusing on promising sites and drilling longer horizontal well sections to maximize contact with oil-bearing rock.
While OPEC⁺ production cuts have stabilized prices at relatively high levels, U.S. producers are benefiting from this stability.
The current strategy seems to embrace non-OPEC non-shale (NONS) producers, similar to how North Sea producers did in the 1980s.
Saudi Arabia, along with its OPEC⁺ partners, is resuming its role as a swing producer, balancing the market by adjusting its output.
Despite OPEC’s inability to formally collaborate with U.S. shale producers due to antitrust laws, efforts are made to include other NONS producers like Brazil in the coordination system.
This outreach aligns with the historical pattern of embracing rival producers to maintain control over a significant share of global production.
In contrast, U.S. gas production hit a seasonal record high in September, reaching 3,126 billion cubic feet.
However, unlike crude, there are signs that gas production growth is slowing due to very low prices and the absence of a swing producer.
Gas production increased by only 1.8% in September 2023 compared to the same month the previous year.
While the gas market is in the process of rebalancing, excess inventories may persist, keeping prices low.
The impact of a strengthening El Niño in the central and eastern Pacific Ocean could further influence temperatures and reduce nationwide heating demand, impacting gas prices in the coming months.
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