03 July 2013 | PSG Cascades - Pietermaritzburg | 033 347 2620 | [email protected]

www.psg.co.za/cascades/

Turmoil in Egypt could disrupt oil supply Japan – The Nikkei Index climbed to its highest level in five weeks on Wednesday morning supported by the weak yen. This marked the fourth straight day of gains which is the longest winning run since midMay.
Hong Kong – Chinese shares closed lower on Wednesday, pulling down Hong Kong markets as financial and material counters fell under high selling pressure.
European markets - As per Reuters, European shares closed lower on Tuesday, with Wednesday’s trading session expected to track sharp losses in Asia after downbeat Chinese macro data and further impacted by mounting tension in Egypt.
U.S. markets – As per Reuters, American shares closed lower on Tuesday, erasing earlier gains realised on news of positive car sales and factory orders.
Local markets – The Business Day reports that the JSE closed lower on Tuesday to end its five-day winning streak, amid some consolidation. The all share index ended 0.22% lower at 39,844.70, with the blue-chip top 40 index falling 0.32%.
Rand – The Rand was last trading weaker at R10.01 against the dollar and R12.99 against the Euro. The Rand also depreciated against the pound and was last trading at R15.17 to the Pound.
Precious Metals – Gold prices was lower on Tuesday at $1 246.49 following appreciation of the dollar. Platinum dropped to $1 367 while the price of Palladium edged to $688.
Oil Price – Brent crude oil was last trading higher at $103.97 a barrel buoyed by fear that turmoil in Egypt could destabilise the Middle East and disrupt oil supplies.


Adcock News






Chilean listed business, CFR Pharma have made a non-binding cash and stock bid for all or part of Adcock Ingram (AIP) for R73.51 a share, valuing the bid at 12.875 billion ZAR in full. The stock of Adcock is up 2.56% at time of print and currently trades at R66.15, a discount still to the potential offer price. Investors remain cautious as there is still no certainty at this stage that a firm offer will be proposed Adcock has been recommended as a BUY by PSG Online to R68 (see Top Ten Buys). The Rand has again been one of the worst performing currencies, depreciating by 15% against the USD year to date in 2013. RMB and Nedbank Capital Provide some interesting insight.

Article of interest: RMB Global Markets Research – JUNE 2013 Currency: Liquidity Portfolio inflows at the start of 2013 were excellent. Bond flows actually were above the equivalent period in 2012 which was boosted by South Africa’s inclusion in the WGBI, while equities had the largest net inflows in any period since the 2008 financial crisis. •

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The latter part of May, however, saw sustained outflows from the bond market and some mild equity outflows. In total this still leaves large net flows for the year but it’s clear that the outflows in the most recent period have been a major contributor to rand weakness. Our view remains that the rand will remain under pressure until inflows resume. Net reserves have fallen slightly in recent months. This is mostly a result of valuation effects from the stronger dollar. It may also indicate mild selling of reserves by the SARB. The global currency market remains extremely long dollars as expectations grow that the Fed will soon start to taper its quantitative easing programme.

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Currency: Valuations The rand is now almost certainly undervalued. Using our simple REER model, which assumes the rand’s underlying value remains flat on a trade-weighted inflation-adjusted basis, the rand is now 14% undervalued. This is large, although the rand was even more undervalued in both 2001 and 2008. • • •

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Additional, more complex, models that we run suggest that the rand is now undervalued, although the extent of the undervaluation is open to question. Just because the rand is undervalued doesn’t mean that it will have to appreciate. History shows that the rand overshoots, particularly to the weaker side of fair value. Rand volatilities have increased sharply over the past six weeks. Even so, implied volatility is only trading back in line with the long-term average. The shape of the curve is also fairly normal, as risk-reversals and butterflies have increased in line with at-the-money implied vols. Rand probability bands continue to show the huge possibility of future outcomes given the high volatility of the unit.

Notes: • •

The JP Morgan Global PMI acts as a barometer of the overall health of the global manufacturing sector The composite global volatility index calculated by RMB is composed of the implied volatility on equities, 10-year swaps and currencies for the US, UK, EU and Japan. It is equally weighted.

Nedbank Capital Daily Market Commentary - 3 July 2013 By Mohammed Yaseen Nalla, CFA and Tasnim Rawat.

The USDZAR broke above its medium term (May 2012/May 2013) depreciating channel and surged to the weakest level in 4 years in June. After the sharp blow out the rand has experienced some consolidation around the R10.00/USD, forming a wedge pattern with the current wedge range between R9.85-R10.25. Downside momentum in the short term favours a move lower and a break below this wedge formation would suggest potential downside towards the R9.60/USD level. However, continued dollar strength risks pushing the rand above this formation and should the rand break above the current formation, would open up a move towards the R10.60/USD level. •

The NEER (which measures the rand against a basket of currencies of SA’s major trading partners weighted according to value of trade) remains below its long term declining trend, presently trading at 55.5 index points, within sight of the all-time record low of 52 experienced in October 2008 during the peak of the global financial crisis.

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This highlights that the longer term outlook for the rand remains weak, plagued with a barrage of negative factors - both international factors (a globally stronger dollar, deteriorating sentiment towards emerging markets, falling commodity prices amid growing expectations of a tapering of US stimulus) and domestic factors (persistent labour unrest and threat of power outages exacerbating weak growth outlook and elevated twin deficits maintaining worries over funding).

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The long term bull trend in the dollar index (which measures the greenback against a basket of major US trading partners weighted according to value of trade) has been maintained, with the greenback finding support above the long term 2011/2013 trend line. The greenback is likely to continue garnering support against other major currencies as the US is likely to be the first amongst developed economies to begin normalising monetary policy. A move toward the upper end of the long term sideways range around 84 index points is likely, with only a break above this level confirming a renewed dollar appreciating trend.

Disclaimer: The opinions expressed in this document are the opinions of the writer and not necessarily those of PSG Konsult and do not constitute advice. Although the utmost care has been taken in the research and preparation of this document, no responsibility can be taken for actions taken on information in this newsletter. Should you require further information, please consult an adviser for a personalised opinion.