18 Nov

Daily Market Report 18 Nov

South Africa (SA)

  1. S&P Upgrades SA’s Credit Outlook:

    • Impact of the Upgrade: S&P Ratings’ decision to raise South Africa’s credit rating outlook from stable to positive is a significant vote of confidence in the GNU’s reformist agenda. The move is based on anticipated political stability and reforms aimed at boosting GDP growth, private investment, and narrowing fiscal deficits.
    • Market Response: This unexpected upgrade has positively influenced investor sentiment, contributing to the ZAR’s recovery. The credit outlook boost may incentivize continued reforms and efforts by the government to solidify these gains, such as improvements in governance and infrastructure investments.

  2. Electricity Regulation Amendment Act Delays:

    • Legislative Challenges: Disputes between the national government and municipalities over their roles are holding up the implementation of the Electricity Regulation Amendment Act. This act is crucial for restructuring the energy sector and improving SA’s power supply stability.
    • Implications for Growth: Delays in passing this amendment could hinder growth and investor confidence, as reliable energy remains critical for sustained economic performance and industrial recovery.

  3. SARB Interest Rate Decision and Inflation Outlook:

    • Anticipated Rate Cut: The SARB is expected to announce a 25bp rate cut, supported by a moderation in inflation. October inflation data is anticipated to show a significant deceleration to around 3.0% y/y, at the lower end of the SARB’s 3-6% target range.
    • Monetary Policy Stance: While a rate cut would align with easing global monetary policies, the SARB is likely to maintain a cautious approach to ensure currency stability and control inflation expectations amid recent ZAR volatility.

Market Insight – FX

ZAR Performance:

  • Current Recovery: Following S&P’s positive outlook upgrade, the ZAR has rebounded to around 18.1400, improving from last week’s lows near 18.4000. This recovery has been bolstered by improved sentiment and anticipation of supportive monetary policy moves from the SARB.
  • Key Influences: The ZAR’s recent resilience will help ease pressure on the SARB as it considers rate adjustments. Additionally, progress in removing SA from the FATF greylist could further strengthen the ZAR by reducing perceived country risk and attracting more capital inflows.

Technical Analysis:

  • Support and Resistance Levels: Immediate support for USD-ZAR is seen around the 18.0000 handle, with a potential retracement to 17.9600, corresponding to a 38.2% Fibonacci level. On the upside, resistance remains near 18.3950.
  • Outlook: While the ZAR’s recovery is promising, sustained improvement depends on the government’s commitment to reform and the global economic environment, especially any shifts in USD strength driven by US economic data and geopolitical developments.

Global Market Dynamics

  1. US Dollar and Interest Rate Trends:

    • USD Outlook: The USD, while slightly weaker at the end of last week, remains strong, bolstered by expectations of continued growth under Trump’s presidency and potential inflationary pressures from policies like tax cuts and tariffs.
    • Fed’s Stance: Fed Chair Jerome Powell’s remarks highlight the central bank’s willingness to be data-dependent, indicating that while a December rate cut is possible, future rate decisions will hinge on economic performance and inflation metrics.

  2. Geopolitical Developments:

    • Biden’s Support for Ukraine: The decision to allow Ukraine to use US missiles to target deep within Russian territory has geopolitical implications that could impact risk sentiment globally. Heightened geopolitical risks can lead to safe-haven flows into assets like the USD and gold, influencing the ZAR and other emerging market currencies.

Market Insight – Fixed Income

SA Bond Market Performance:

  • Resilience Amid ZAR Volatility: The SA bond market has shown notable resilience, supported by S&P’s credit outlook upgrade and expectations for a SARB rate cut. This resilience indicates investor confidence in SA’s fiscal and reform trajectory despite recent ZAR depreciation.
  • Yield Trends: Bond yields have remained stable, reflecting a perception that the ZAR’s recent weakness was temporary and driven by external factors (e.g., US political and economic developments). If the SARB’s rate cut is confirmed, it could provide further support to the bond market by reinforcing expectations of controlled inflation.

Outlook and Implications:

  • Reform-Driven Growth: The potential for further bond market gains relies on the GNU implementing growth-friendly policies that boost investor confidence. Sustained GDP growth and fiscal discipline will be crucial to solidify the positive outlook and attract foreign capital.
  • Yield Curve and Inflation Risk: Bond market performance will continue to reflect inflation expectations and the ZAR’s trajectory. Should the currency stabilize and inflation moderate further, SA bonds could see increased demand.

FRAs and Rate Cut Expectations

  • Current Pricing: The FRA curve is aligned with expectations of a 25bp rate cut, reflected in the 1X4 spread at -19bp to 3m JIBAR. Beyond that, the 3X6 spread at -41bp and the 6X9 spread at -53bp indicate expectations for cautious easing into 2025, contingent on macroeconomic stability.
  • Monetary Policy Insight: The SARB’s cautious approach will balance the need to support growth and protect the ZAR from excessive volatility. Further clarity will emerge from Governor Kganyago’s statement, particularly on how the SARB plans to navigate potential external shocks.

 

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