South African markets are grappling with heightened geopolitical risk and renewed local optimism as Israel’s military operation in Iran and Pretoria’s greylist progress create contrasting economic currents.

Geopolitical Flashpoint: Israel-Iran Conflict Escalates

The fifth consecutive day of hostilities between Israel and Iran has intensified investor concerns over a broader Middle East conflict. Israel’s Operation Rising Lion, targeting Iranian nuclear facilities and military leadership, prompted Tehran to retaliate with missile and drone strikes. The United States has distanced itself from the conflict, with President Trump emphasising non-involvement and calling for evacuations from Tehran.

This sharp escalation rattled global markets initially, causing oil prices to spike and stock futures to dip. Although crude prices later eased as production remained unaffected, tensions remain high. With the conflict threatening regional energy supply chains, Brent crude surged above $73 per barrel before settling, while risk assets saw sharp volatility.

South Africa: Geopolitical Exposure and Strategic Gains

While the crisis underscores South Africa’s complicated geopolitical positioning—often perceived as sympathetic to Iran—it has so far avoided the worst of market fallout thanks to strong commodity linkages, particularly in gold. Investors appear to be maintaining confidence, buoyed by more constructive domestic political narratives and expectations of South Africa’s imminent exit from the FATF greylist.

National Treasury confirmed that all 22 FATF action items have now been completed, including the critical benchmarks on investigations and prosecutions. An on-site assessment is expected ahead of the FATF plenary in October 2025. Treasury emphasised that these reforms reinforce efforts to fight financial crime and improve SA’s international standing.

ZAR Holding Steady, For Now

The rand remains resilient in early trade, hovering around 17.83/$ despite pressure from higher oil prices. Support comes from strong gold prices—gold remains above $3,400/oz—and hopes for improved capital inflows linked to the greylist exit. However, risks remain asymmetric. The geopolitical backdrop and global risk aversion may eventually shift sentiment against the ZAR.

The USD-ZAR remains caught in a corrective pattern, with a potential technical target at 18.19/$ if current global tensions persist.

Bond Markets: Disinflation Theme Dominates

In the fixed income space, Friday’s inflation-linked bond (ILB) auction underwhelmed, with only R430 million allotted against a R1 billion target. Weak demand signals market confidence in a disinflationary environment, further supported by expectations that the SARB will formally lower its inflation target to 3%—a shift already partially priced into vanilla bond yields.

The 5-year breakeven rate rose slightly to 4.03%, while the 10-year settled at 5.01%, still below historical averages. Meanwhile, vanilla SAGBs continue to perform well, helped by a stable rand and diminishing inflation fears.

Global Central Banks and Data in Focus

Investors are eyeing this week’s Fed decision, with consensus overwhelmingly expecting rates to remain on hold. Despite softer inflation data, the Fed is expected to remain cautious due to tariff-driven inflation risks and geopolitical uncertainty. Similarly, the BoE is likely to hold rates on Thursday, with more dovish guidance expected as growth cools in the UK.

The Bank of Japan left rates unchanged and outlined a cautious tapering plan, indicating a desire to reduce its bond purchases slowly over time to avoid market disruption.

 Bottom Line:

Despite rising geopolitical tensions, South Africa is navigating the turmoil with cautious optimism. Global events may yet weigh on risk sentiment, but for now, SA’s commodity exposure and improved fiscal governance—exemplified by FATF progress—are providing a shield. Market participants will be watching inflation prints and Fed guidance closely to determine the next move for the rand and bon