USD CBE auction (Tuesday, 14 June): 8.78 (unchanged since Wednesday, 16 March)
USD parallel market (Saturday, 11 June): 10.92-10.95 (compared to 10.90 on Tuesday, 7 June, domestic press)
EGX30 (Tuesday): 7,570.05 (-0.98%)
Turnover: EGP 427.9 mn
EGX 30 year-to-date: +8.05%
THE MARKET ON TUESDAY: EGX30 fell 1.0% by the end of trading yesterday. The benchmark index’s top-performing stocks were Ezz Steel and Elsewedy Electric, which were also the only index members to close in the green. Edita Food Industries, GB Auto, and South Valley Cement were the index’s worst-performing constituents. Market turnover stood at EGP 427.9 mn, and foreign investors were the sole net buyers.
Foreigners:Net long | EGP + 45.8 mn
Regional:Net short | EGP – 2.4 mn
Domestic:Net short | EGP – 43.4 mn
Retail: 51.9% of total trades | 51.0% of buyers | 52.8% of sellers
Institutions: 48.1% of total trades | 49.0% of buyers | 47.2% of sellers
Foreign: 21.4% of total | 26.8% of buyers | 16.1% of sellers
Regional: 9.7% of total | 9.4% of buyers | 10.0% of sellers
Domestic: 68.9% of total | 63.8% of buyers | 73.9% of sellers
Expect the MPC to maintain rates; cost of a rate hike outweighs the potential benefits
We expect the Egypt MPC to maintain rates at its upcoming meeting on Thursday, 16 June, with a potential rate hike in one of the following two meetings. In the background: inflation; currency defense dynamics, the budget deficit, and low economic growth are not supportive of a rate hike, for the time being.
- Inflation spiked, but the reasons are clear. The annual core inflation rate accelerated to 12.3% in May 2016 from 9.5% in April, as consumer prices jumped 3.05% m-o-m. This is a natural result of the 13% drop in the EGP versus the USD, effective March 2016, and the pre-Ramadan surge in demand.
- Further rate hikes would not defend the local currency, unless it is undertaken aggressively at +200-300bps, which would not help an already high budget deficit. This has presented itself following the March devaluation when most banks raised rates on 3- and 5-year CDs to 12.5%, with an even higher 15% rate for USD converted to local currency funds.
- The shortage of USD and other foreign currency continues to pressure economic growth, especially within the industrial sector. A rate hike would not be helpful for business and the private sector in general.
- Consensus points to a Fed hike in July rather than in June. After a disappointing employment report for May 2016, the consensus has shifted towards a July, rather than June, Fed rate hike. If the Fed maintains, this will further support our view that the Egyptian MPC will maintain rates.
If the MPC maintains rates, there should be no effect on the EGX. A rate hike would be negative for equities due to higher required rate of return.
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