28 Jan

Daily Market Report 28 Jan

Financial Markets Rattled by DeepSeek Disruption and Broader Volatility

Key Developments

  • Global Tech Selloff:
    • DeepSeek Disruption: A low-cost AI model from China’s DeepSeek shook markets, raising doubts about the dominance and valuations of major US tech companies. Nasdaq futures plunged nearly 4%, and Nvidia, Oracle, and other AI-aligned stocks suffered sharp losses.
    • Market Fragility: The selloff exposed vulnerabilities tied to tighter global liquidity conditions as central banks maintain quantitative tightening amidst high government debt issuance.
  • South Africa:
    • SARB Challenges: Increased global risk aversion has amplified ZAR volatility ahead of Thursday’s Monetary Policy Committee meeting, complicating the decision to implement a 25bp rate cut.
    • Municipal Bailout Speculation: Rumors suggest the upcoming budget could include support for municipalities to aid Eskom’s recovery.
    • Trump’s Pause on Aid: Suspension of US external direct aid, including HIV/Aids funding, poses risks to South Africa’s health programs.

Market Insight – FX

  • ZAR:
    • Spot: 18.8400 | Range: 18.68/19.0100.
    • Risk-off sentiment from DeepSeek-related tech selloffs and potential US tariffs has pushed USD-ZAR higher, with momentum likely favoring the upside toward resistance at 19.0050 and 19.2300.
    • SARB’s Dilemma: Rising ZAR volatility may prompt the central bank to hold off on a rate cut to maintain currency stability.
  • Global FX:
    • The USD rebounded after initial losses tied to risk-off sentiment. Trump’s proposed tariffs and protectionist rhetoric support the dollar, while concerns around DeepSeek amplify uncertainty.
    • The EUR/USD is under pressure, with the euro targeting 1.0400. GBP/USD remains bearish amid weak sentiment, and USD/JPY saw heightened volatility as implied yen options premiums spiked.

Market Insight – Fixed Income

  • Global Bonds:
    • US Treasuries: The tech selloff and broader volatility drove yields lower as investors sought safe-haven assets. Should volatility persist, the Fed might slow or pause quantitative tightening to stabilize markets.
    • SA Bonds: Local bond markets were steady despite global turbulence, reflecting cautious investor positioning ahead of SARB’s meeting.
  • FRAs:
    • Markets are pricing in a 25bp rate cut by the SARB on Thursday, though recent volatility raises the likelihood of a pause. Longer-term rate expectations are moderating, with additional cuts only expected later in the year.

Outlook

  • ZAR Vulnerability: The ZAR’s recent selloff underscores its sensitivity to global risk sentiment. SARB’s decision and further clarity on Trump’s tariff plans will shape near-term direction.
  • Global Markets: The emergence of DeepSeek could accelerate a broader tech correction, while tighter liquidity conditions and potential central bank pivots remain key themes.
  • SARB Strategy: The central bank faces a tough call: cut rates to support growth or hold steady to prevent adding pressure on the ZAR during heightened global volatility.

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