10 Dec

Daily Market Report 10 Dec

China Stimulus Measures and Gold Purchases Bolster ZAR Sentiment

 

Talking Points

  • SA: OR Tambo refueling issues ground flights, causing delays.
  • SA: Joburg Water identifies a R27bn infrastructural backlog for repairs.
  • SA: Black Business Council urges a ban on McKinsey.
  • CH: China’s November imports decline by the sharpest margin in 14 months.

Economic Performance Updates

South Africa’s Economic Indicators

  • Mining Production:

    • Growth surged to 4.7% y/y in September (Aug: 0.3% y/y), driven by iron ore output.
    • Mineral sales rose 8.0% y/y, supported by a spike in gold sales.
    • Structural barriers, including logistical inefficiencies at ports and railways, continue to constrain sustainability.

  • Manufacturing Output:

    • Declined by -0.8% y/y in September, mirroring August’s contraction.
    • October’s weak PMI suggests continued lackluster results unless policy incentivizes private sector investment.

  • PPI:

    • Final goods inflation fell to -0.7% y/y in October (Sept: 1.0% y/y), driven by petroleum deflation.
    • November’s fuel price rebound is expected to push PPI slightly higher to 0.2% y/y, signaling possible CPI upticks ahead.

International Context

  • China Stimulus:
    • China’s fiscal and monetary stimulus measures are seen as attempts to stabilize its slowing economy.
    • The People’s Bank of China resumed gold purchases, boosting the gold price and supporting South Africa’s terms of trade.
    • These developments have strengthened the ZAR and supported broader market sentiment.

Market Insight – FX

ZAR Performance

  • Spot Rate: 17.8200; Range: 17.6900/18.1800.

  • Drivers:

    • Positive sentiment from China’s stimulus efforts and gold purchases has buoyed the ZAR.
    • Improvements in ETM’s ZAR sentiment index and SARB’s conservative monetary policy stance add resilience.
    • Narrowing current account deficits and high interest rates remain supportive factors.

  • Outlook:

    • Sustained gains depend on progress in GNU-led reforms and enhanced mining and manufacturing efficiencies.
    • Risks include structural inefficiencies and potential global commodity price declines.

Global FX Trends

  • USD:

    • Index trading at 106.17, supported by geopolitical tensions and rising Treasury yields.
    • Market attention shifts to Wednesday’s US CPI data.

  • EUR/USD:

    • Trading around 1.0570, with focus on Thursday’s ECB meeting.
    • A 25bp rate cut is priced in, but forward guidance will influence the euro’s outlook.

  • GBP/USD:

    • Steady in Asia, hovering near 1.2700, as the UK embarks on a “zero-based review” of government spending.

  • USD/JPY:

    • Bid at USD/JPY151.85, with support at 149.67, amid uncertainty over the BoJ’s December rate decision.

Market Insight – Fixed Income

South African Bonds

  • Yield Curve:

    • The ZAR’s appreciation and softer inflation expectations have driven yields lower.
    • Expectations of further SARB rate cuts remain intact, with three 25bp cuts projected for 2025.

  • Key Data:

    • Today’s PPI data will provide additional confirmation of easing price pressures.
    • Upcoming CPI data will refine expectations around the SARB’s January meeting.

  • Privatization Needs:

    • Calls for structural reforms, including privatization of SOEs like Transnet, are growing louder.
    • Efficient public-private partnerships could unlock the country’s growth potential and stabilize fiscal risks.

FRAs

  • Curve Positioning:
    • 3X6 Spread: -35bp, signaling a January rate cut.
    • 6X9 Spread: -67bp, indicating two rate cuts in H1 2025.
    • 12X15 Spread: -81bp, reflecting expectations of three cuts next year.

Global Bond Markets

German and Eurozone Bonds

  • German 10-Year Yield: Fell to 2.11%, reflecting a shift to safe-haven assets.
  • ECB Policy Outlook: A 25bp rate cut this Thursday is widely expected, with communication likely signaling “neutral” rates near 2%.

US Treasuries

  • Fed Cut Odds: Rising expectations for an 87% chance of a Fed rate cut after Wednesday’s CPI print.

Key Risks

  • Geopolitical instability in Europe (e.g., France’s government collapse) and volatile Chinese trade dynamics remain risks to global bond markets.

Strategic Insights

Short-Term Focus

  1. Inflation Data:
    • PPI and CPI prints this week will clarify the trajectory of SARB’s rate-cutting cycle.
  2. Global Developments:
    • Markets await cues from the ECB, US CPI, and China’s next steps to bolster its slowing economy.

Long-Term Outlook

  1. Structural Reforms:
    • Progress in mining logistics and manufacturing policies will be key to sustaining growth and reducing fiscal pressures.
  2. Privatization Push:
    • Including the private sector in resolving SA’s infrastructure and SOE challenges will unlock efficiencies and foster growth.

 

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