19 Nov

Daily Market Report 19 Nov

South Africa (SA)

  1. FSCA Probe on Two-Pot Withdrawal Fees:

    • Current Developments: The Financial Sector Conduct Authority (FSCA) is investigating withdrawal fees tied to the two-pot retirement system, aiming to ensure fair practices and protect savers. This move highlights a focus on transparency and consumer protection in financial regulations.
    • Implications for Confidence: Effective oversight from the FSCA can build trust in SA’s financial systems, supporting long-term investments and stability in the financial sector.

  2. SA’s G20 Presidency Focus:

    • Reforming Governance: South Africa’s upcoming G20 presidency, which plans to focus on governance reforms in key global institutions, positions the country as an influential player advocating for a more equitable global economic structure.
    • Strategic Significance: This focus aligns with SA’s broader agenda of fostering better trade relations and enhancing its geopolitical influence, which could bolster investor sentiment and strengthen economic ties with G20 members.

  3. Participation in COP29:

    • Securing Green Energy Funding: SA’s participation in COP29 underscores its commitment to sustainable energy transformation and securing international funding for green initiatives. Given SA’s reliance on coal and its pressing need for energy transition, international funding can play a vital role in mitigating financial pressures and expediting green projects.
    • Economic Benefits: Access to green financing can stimulate job creation, technological advancements, and foreign investment, contributing to economic growth and reducing fiscal constraints.

Market Insight – FX

ZAR’s Recovery Path:

  • Positive Momentum from S&P’s Upgrade: The ZAR has appreciated significantly, currently trading around 17.9450, following S&P’s improved outlook for SA’s credit rating. This change signals market confidence in the GNU’s reformist agenda, which could attract capital inflows and foster a stronger currency.
  • Technical Levels: With the ZAR breaking below the 18.0000 level and surpassing the 38.2% Fibonacci retracement at 17.9600, further appreciation to the 50% retracement at 17.8250 and potentially the 61.8% retrace at 17.6900 is possible. Resistance at 18.1250 remains relevant for any near-term rebounds.
  • Broader Context: Sustained improvements will depend on the GNU’s ability to implement reforms that attract private sector investment and enhance infrastructure.

Factors Supporting the ZAR:

  • Reform Trajectory: Prudent policy steps that address infrastructure needs and improve investment conditions can initiate a positive feedback loop, boosting economic growth and investor confidence.
  • Bond Market Dynamics: SA bonds held firm despite recent ZAR depreciation and a rise in US Treasury yields, reflecting a market view that local economic fundamentals may be strengthening relative to external factors.

Global Context

  1. US Dollar and Trump’s Stance on Ukraine:

    • USD’s Position: The US dollar remains strong, supported by expectations of ongoing US growth under Trump’s policies. However, calls for negotiations rather than escalation in Ukraine might moderate geopolitical risks and reduce the USD’s appeal as a safe haven.
    • Potential USD Correction: Given that the USD index is still above 106.00, a pullback towards 105.00 could materialize if economic data or geopolitical developments shift market sentiment.

  2. Euro and ECB Expectations:

    • Policy Outlook: The euro faces potential downward pressure, especially if the ECB opts for a larger-than-expected rate cut in December. Current market pricing suggests a 25bp cut is expected, with a 20% chance of a 50bp reduction.
    • Economic Data Focus: The upcoming euro area wage growth and PMI data will be pivotal in shaping ECB policy expectations. Weak data could heighten the likelihood of further monetary easing.

  3. GBP and BOJ Developments:

    • Sterling’s Stability: After recent declines due to a stronger USD and weak UK economic data, the GBP has steadied. Traders are now monitoring for signs of stabilization as the outlook for UK interest rates evolves.
    • BOJ Rate Prospects: The USD/JPY pair remains capped by potential BOJ intervention and hawkish undertones, suggesting that Japan may consider rate hikes if inflation aligns with expectations.

Market Insight – Fixed Income

SA Bond Market Resilience:

  • Current Status: Despite recent ZAR volatility and higher US Treasury yields, SA bonds have shown remarkable stability. This suggests that investors see value in SA debt, underpinned by S&P’s positive credit outlook and expectations of SARB’s prudent policy measures.
  • Yield Spread Observations: The tightening spread between SA 10-year and US 10-year bonds reflects confidence in SA’s potential fiscal improvements versus concerns over US fiscal health. Sustaining this spread may depend on further evidence of SA’s reform commitment and economic growth.

Auction Insight:

  • Upcoming Bond Sales: The auction of R2033, R2038, and R2040 bonds is set to test market appetite. The shorter-duration bonds are expected to attract interest, especially given the ZAR’s recent appreciation.

FRA Curve and Rate Expectations:

  • Monetary Policy Anticipation: With the SARB’s MPC meeting on the horizon, the FRA curve reflects a cautious outlook. The 1X4 FRA at -21bp suggests a high probability of a year-end rate cut, while longer spreads indicate expectations of at least two 25bp cuts over the next six months, contingent on stable economic conditions.

Strategic Insights for SA’s Future

Investment-Led Growth:

  • Focus on Infrastructure: Prioritizing infrastructure spending and improving logistical efficiencies can create a robust foundation for sustained economic growth.
  • Private Sector Engagement: Leveraging private sector investment to drive growth and operational efficiency in key sectors and SOEs can amplify the multiplier effect, fostering a prosperous cycle of reinvestment and expansion.

Policy Implementation:

  • GNU’s Role: For SA to capitalize on recent positive market sentiment, the GNU must demonstrate resilience and a commitment to implementing pro-growth reforms without yielding to internal political pressures.
  • Building Momentum: If successful, these reforms can pave the way for future credit rating upgrades and a more resilient ZAR.

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