12 Nov

Daily Market Report 12 Nov

South Africa (SA)

  1. City Power and Joburg Electricity Crisis:

    • Development: City Power’s efforts have managed to stave off a potential electricity crisis in Johannesburg, at least temporarily. This development is crucial for maintaining public confidence and preventing disruptions that could have wider economic impacts.
    • Market Impact: While this resolution provides temporary relief, the broader issues of energy supply remain a long-term concern that can weigh on investor sentiment and economic productivity.

  2. COP29 and Debt Sustainability:

    • Global Context: Discussions at COP29 have raised concerns about debt sustainability for poorer nations, including SA. The pressure to finance climate change mitigation and adaptation efforts can exacerbate existing fiscal constraints.
    • Fiscal Concerns: This could translate to higher borrowing costs or increased debt levels if South Africa needs to fund more environmental and sustainability projects. Any signs of debt pressure would likely reflect in bond yields and currency weakness.

  3. Labour Market Struggles:

    • Unemployment Data: SA’s official unemployment rate stood at a troubling 33.5% in Q2 2024, with an expanded rate including discouraged workers at 42.2%. High unemployment levels reflect deep-rooted structural challenges.
    • Policy and Market Sentiment: The labour market remains a significant drag on growth. While reforms under the Government of National Unity (GNU) may offer a glimmer of hope, businesses are likely to remain cautious on hiring until clearer signs of sustained economic momentum emerge.

  4. Manufacturing Sector Challenges:

    • Recent Performance: Manufacturing production saw a notable contraction, with vehicle production declining due to lower export demand. This is an underperformance for a sector considered a model for state-supported industrial success.
    • Outlook: September’s data is expected to show a slight improvement, but ongoing challenges suggest that the manufacturing sector may not be a strong growth driver in the near term.

  5. Gauteng Water Crisis:

    • Impact: Tighter water restrictions in Gauteng signal worsening infrastructure issues that threaten public health and economic stability.
    • Fiscal Ramifications: Addressing this crisis could necessitate further government intervention, adding pressure to the national budget. This situation might lead to discussions around possible Treasury support or bailouts, raising concerns about fiscal sustainability.

Market Insight – FX

USD-ZAR Performance:

  • Current Dynamics: The ZAR has depreciated to 17.9450, reflecting both local economic challenges and global shifts tied to Trump’s reelection. The USD has strengthened significantly on expectations of pro-growth policies, creating a challenging environment for the ZAR and other emerging market currencies.
  • Gold and Commodities: The dip in gold prices to $2616.20 from recent highs has hurt SA’s terms of trade, impacting the ZAR as commodity-linked currencies come under pressure.
  • Outlook: With the potential for further depreciation towards 18.5000, the ZAR faces a tough path. Resistance levels at 18.0200 will be critical; if breached, 18.2400 could be targeted. Downside support is at 17.7000, but market momentum suggests tests of resistance are more likely in the short term.

Factors to Monitor:

  • US Policy Influence: Investors are assessing the implications of Trump’s win on the USD, especially in terms of potential inflation driven by fiscal policies and trade actions.
  • Long-Term Risks: While the “Trump trade” currently benefits the USD, structural challenges in the US economy, such as high debt and potential trade conflicts, could eventually limit further gains.

Global FX Trends

  1. USD Strength and Eurozone Challenges:

    • Dollar Ascent: The USD Index rose to 105.50, supported by expectations of economic growth under Trump’s policies.
    • Eurozone Weakness: The euro has remained pressured amid political instability in Germany and broader EU concerns about responding to potential US tariffs. With Chancellor Olaf Scholz hinting at a vote of confidence, the region faces political and economic uncertainty that keeps EUR/USD vulnerable to further declines.

  2. Pound Sterling Trends:

    • GBP Performance: The pound continues to weaken, currently trading around GBP/USD1.2850. With broad USD strength and political uncertainties, sterling is vulnerable to further losses, with key support levels at GBP/USD1.2831.

  3. JPY Weakness:

    • Yen Trading: The yen started the week weaker, trading above USD/JPY153.30, as Japanese markets navigate the implications of Trump’s win and its potential impact on global trade dynamics.

Market Insight – Fixed Income

  1. SA Bonds and Yield Spreads:

    • Current Positioning: The spread between SA and US 10-year bonds has compressed to its tightest level in over a decade at 484bps. The ZAR’s depreciation could force local bond yields higher, which may impact the attractiveness of SA bonds relative to US Treasuries.
    • Auction Watch: The upcoming auction of R2033, R2035, and R2038 bonds, aimed at raising R3.75bn, will be closely monitored. Demand for shorter-dated instruments with good liquidity is expected, but ZAR weakness could put upward pressure on yields.

  2. FRA Movements:

    • Interest Rate Expectations: The 1X4 FRA shows a guaranteed rate cut by year-end, while medium-term spreads suggest two to three cuts are priced into the cycle. Sustained ZAR weakness could influence SARB’s conservative stance and lead to a reassessment of these expectations.

 

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