14 Nov

Daily Market Report 14 Nov

South Africa (SA)

  1. GNU Tensions Over SABC Bill:
    • Political Unrest: The DA’s withdrawal of the SABC bill has heightened tensions within the Government of National Unity (GNU). Such disputes may signal deeper political fragmentation, which could unsettle investor confidence and weigh on market sentiment.
    • Market Relevance: Persistent political friction can amplify economic uncertainties, potentially influencing both domestic and international perceptions of SA’s fiscal and political stability.
  2. Manufacturing Sector Challenges:
    • Continued Weakness: Despite no load-shedding, SA’s manufacturing production remains under significant pressure, contracting by -0.8% y/y in September. The sector’s persistent struggles underscore underlying structural challenges that need multifaceted policy interventions, including infrastructure improvements and better workforce development.
    • Economic Implications: A lagging manufacturing sector could limit overall GDP growth and act as a deterrent to both local and foreign investment.
  3. First USD Bond Issuance Since 2022:
    • Positive Reception: SA successfully issued its first USD-denominated bonds since 2022, raising $3.5bn across two maturities (2036 and 2054), with strong investor interest reflected in bids exceeding $8.6bn. This signals continued confidence in SA’s fiscal management, despite current challenges.
    • Investor Sentiment: The strong bond auction suggests that, at least for now, SA’s credit story holds appeal amid the GNU’s fiscal conservatism.

 

Market Insight – FX

ZAR Performance:

  • Current Status: The ZAR has broken through key technical support levels, trading around 18.2800. This marks significant depreciation, extending nearly 8% since early October, and aligns with the USD rally driven by Trump’s electoral win and expected pro-growth policies.
  • Factors at Play:
    • Trump Trade Impact: The strong USD reflects optimism about reduced regulatory burdens and potential economic growth spurred by Trump’s policies. These expectations have sustained the USD’s global carry trade appeal, putting pressure on commodity-linked currencies, including the ZAR.
    • SARB’s Position: The SARB is under pressure to maintain its conservative stance in response to ZAR volatility. This could mean only minimal rate cuts ahead, despite disinflation trends.

Outlook and Technical Analysis:

  • Short-Term Targets: Resistance near 18.4800 (medium-term Fibonacci retracement level) could serve as the next target if USD strength continues. Support around 18.1500 may hold if momentum slows.
  • Strategic Considerations: A further fall in the ZAR could compel the SARB to adopt a more cautious policy, aiming to stabilize the currency and maintain its attractiveness for carry trades.

 

Global FX Context

  1. USD Strength and Implications:
    • Rising Treasury Yields: US 10-year yields have moved to 4.48%, supported by expectations of persistent inflationary pressures due to Trump’s policies, including potential tax cuts and tariffs. The Fed’s ongoing quantitative tightening adds to the upward pressure.
    • USD Outlook: The USD Index has breached 106.00, reflecting strong market sentiment around US economic resilience. This poses challenges for currencies like the ZAR, AUD, and CAD, which depend on stable or rising commodity prices.
  2. Impact on Major Currencies:
    • EUR and GBP: The euro remains under pressure, trading near EUR/USD1.0550, as Trump’s potential tariff measures heighten downside risks. Meanwhile, the pound has weakened amid lower UK inflation and gradual BoE rate cuts, adding further strain against the strong USD.
    • JPY Weakness: The yen continues to decline, with USD/JPY touching 156.06. The lack of intervention from the Japanese Ministry of Finance signals an environment where buying the dips remains a popular strategy.

 

Market Insight – Fixed Income

  1. SA Bond Market Dynamics:
    • Resilience Amid Depreciation: Despite the weaker ZAR, SA’s bond market has shown resistance, with the spread between SA and US 10-year yields compressing to 471bps. This is historically tight and reflects strong demand for SA debt amid concerns about US fiscal expansion.
    • Sustainability Concerns: The sustainability of this tight spread is questionable. If the ZAR’s weakness affects inflation expectations, domestic bonds may face selling pressure, driving yields higher to re-establish an attractive risk premium.
  2. USD Bond Sales and Global Demand:
    • Positive Auction Outcome: The $3.5bn raised through new bond issues points to sustained global interest in SA’s debt. The bonds’ higher-than-expected bids may provide temporary relief but do not insulate the market from ZAR-driven inflation risks.
    • Long-Term Perspective: Whether SA’s bond market can maintain this resilience depends on global risk sentiment and domestic policy measures aimed at fiscal discipline and economic growth.

 

FRAs and Rate Expectations

  • Current Pricing: The 1X4 FRA indicates a likely rate cut by year-end, with longer-dated FRAs pricing in conservatism. The 6X9 and 9X12 spreads reflect expectations of limited rate cuts, suggesting that the market is cautious about aggressive monetary easing amid ZAR depreciation.
  • Monetary Policy Outlook: If ZAR weakness persists, the SARB may hesitate to cut rates further, aiming to support the currency and keep inflation in check. Conversely, positive inflation data could open the door for modest cuts, maintaining the SARB’s balancing act between growth and stability.

 

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