15 Nov

Daily Market Report 15 Nov

South Africa (SA)

  1. GNU Political Tensions:

    • Context: The DA’s withdrawal of the SABC bill has added tension within the Government of National Unity (GNU). Such developments can stir political uncertainty, which may impact investor confidence and perceptions of policy stability.
    • Implication for Markets: Political discord, especially within a coalition government, can raise concerns about cohesive economic policies and reform implementation, potentially weighing on the ZAR and broader economic sentiment.

  2. Mining Sector Strength:

    • September Production Surge: Mining production showed impressive growth of +4.7% y/y in September, surpassing the consensus estimate of +2.1% y/y. Key contributors included PGMs (+6.7% y/y), iron ore (+10.0% y/y), and a remarkable recovery in diamond production (+35.4% y/y).
    • Economic Implications: This positive development provides a boost to SA’s Q3 GDP outlook and highlights resilience within the mining sector, aided by improved operational conditions without load-shedding disruptions.

  3. First USD Bond Issuance Since 2022:

    • Positive Reception: SA’s recent $3.5bn bond issuance across 12-year and 30-year maturities attracted strong demand, with bids exceeding $8.6bn. This demonstrates continued investor confidence in SA’s debt management.
    • Significance: The strong response suggests that, despite local and global challenges, international investors still find value in SA’s risk premium. This could bolster sentiment in domestic financial markets and provide temporary support for the ZAR.

Market Insight – FX

ZAR Overview:

  • Recent Performance: The ZAR weakened to 18.2600 but has shown signs of stabilization. The depreciation, driven by the USD’s strength following Trump’s electoral victory and policy expectations, has slowed as markets recalibrate.
  • Factors at Play:
    • Trump Trade Momentum: Investors initially rallied behind the USD, anticipating growth-friendly policies that include fiscal stimulus and potential trade protectionism. However, as the “Trump trade” momentum shows signs of easing, the USD’s overbought status raises questions about its sustainability.
    • SARB’s Role: The SARB’s conservative stance could provide a buffer for the ZAR, reinforcing the currency’s carry trade attractiveness. Investors will closely watch the upcoming MPC meeting for policy cues, particularly if inflation dynamics shift due to currency depreciation.

Technical Analysis:

  • Resistance and Support: USD-ZAR is currently testing key levels, with the next target being the 18.4800 medium-term Fibonacci retracement. A breach could signal further depreciation, while support at 18.1500 may hold if momentum wanes.
  • Outlook: While the ZAR’s depreciative momentum is slowing, much depends on domestic policy clarity and global market reactions to US economic data and fiscal expectations.

Global Market Dynamics

  1. US Dollar and Interest Rates:

    • USD Strength and Overbought Risks: The USD Index reached 106.613, filling a technical gap from November 2023 and indicating potential for consolidation or reversal. Overbought signals suggest a pause in USD appreciation could be on the horizon.
    • Fed Policy Outlook: Recent data showing resilient jobless claims and a PPI increase of 2.4% y/y indicate inflationary pressures. This may temper expectations for future Fed rate cuts, with the current probability of a December rate cut down to 75%.

  2. Euro and Sterling Movements:

    • Eurozone: EUR/USD remains under pressure, with bears eyeing further declines amid Trump’s tariff threats and political uncertainties in the EU. Investors are cautious, focusing on upcoming US data for guidance.
    • British Pound: The GBP has dropped significantly since Trump’s win, affected by expectations that US policies could sustain higher inflation and bolster the USD. Support levels at 1.2613 and 1.2446 could provide stabilization as the market evaluates when the decline becomes overextended.

Market Insight – Fixed Income

  1. SA Bonds and Yield Trends:

    • Resilience Amid ZAR Weakness: Despite the depreciating ZAR, SA bonds have shown resilience, potentially reflecting investor confidence in local debt and SARB’s monetary policy. This is notable given the upward trajectory of US Treasury yields.
    • Yield Spread Analysis: The spread between SA 10-year bonds and US equivalents has tightened to 471bps, the lowest in over a decade. While this suggests relative strength in SA bonds, it may not be sustainable if the ZAR’s depreciation begins to influence inflation expectations more prominently.

  2. International Bond Market Context:

    • US Treasury Yields: The 10-year yield reached a high of 4.483% amid expectations of fiscal stimulus under Trump’s presidency, adding pressure to global bond markets. Rising yields signal concerns over the sustainability of US debt levels and potential inflation impacts.
    • Investor Sentiment: While higher yields may support the USD in the short term, longer-term implications include higher debt servicing costs and questions around fiscal discipline.

FRAs and Rate Cut Expectations

  • Current FRA Pricing: The 1X4 FRA remains positioned for a potential rate cut by year-end, but expectations have been scaled back for subsequent cuts. The longer-dated spreads reflect market caution, with the 6X9 spread at -56bp, signaling only two cuts in the next six months, and the 12X15 spread around -67bp, allowing for a potential third cut under specific conditions.
  • Monetary Policy Outlook: The SARB’s approach will balance between inflation management and currency stability. The MPC meeting will be key for setting expectations and could influence future FRA adjustments.

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