20 Dec

Daily Market Report 20 Dec

A Busy Week of Central Bank Decisions Highlights Lingering Inflation Concerns

 

Talking Points

  • SA: Eskom posts a massive R55bn loss but mitigates it with a R36.6bn tax write-back.
  • SA: Botswana lifts its ban on SA vegetables, easing agricultural tensions.
  • SA: National Treasury tightens financial laws to expedite SA’s exit from the grey list.
  • Global: The Fed cuts rates by 25bp but maintains caution, while the BoE holds, and the BoJ surprises markets by refraining from a rate hike.

Economic Overview

South Africa

  • Eskom’s Loss:

    • Eskom’s staggering R55bn loss underscores its operational inefficiencies despite its tax adjustment.
    • Privatization and further structural reforms remain critical for long-term fiscal sustainability.

  • Treasury Moves:

    • Grey List: Proposals to tighten financial regulations could expedite SA’s exit from the FATF grey list, improving investor sentiment.
    • The effort underscores SA’s reformist agenda, essential for maintaining positive sentiment around the GNU.

  • Agriculture Relief:

    • Botswana lifting its vegetable ban reflects regional trade normalization, a win for SA’s agricultural sector.

Global Central Banks

  1. Fed:

    • The 25bp rate cut to 4.25%-4.50% marks the Fed’s third cut of 2024, though future cuts remain uncertain.
    • Hawkish Guidance:
      • Inflation remains stubbornly above the 2% target, complicating the Fed’s path to easing.
      • Markets have scaled back expectations for 2025, now pricing in just two rate cuts.

  2. BoE:

    • Decision to hold rates at 4.75% reflects persistent inflation risks following upside surprises in recent data.
    • A dovish 6-3 vote split indicates growing support for rate cuts in 2025, with markets pricing in 50bps reductions.

  3. BoJ:

    • By abstaining from a widely anticipated 25bp rate hike, the BoJ signaled caution despite rising inflationary pressures.
    • Core inflation accelerated to 2.7% in November, reflecting the weaker JPY and imported inflation challenges.

Market Implications

  • Global Themes:
    • Diverging central bank policies underpin a stronger USD, weighing on commodity currencies like the ZAR, AUD, and NZD.
    • The carry trade dynamic remains dominant, with higher US rates bolstering USD resilience.

Market Insight – FX

ZAR Analysis

  • Spot Rate: 18.4100; Range: 18.2650/4950.

  • Weekly Performance:

    • The ZAR weakened amid Fed-driven USD strength and broader risk-off sentiment.
    • Concerns about China’s economic slowdown exacerbated pressure on the ZAR, which lagged commodity peers early in the week.

  • Outlook:

    • Short-Term:
      • Further downside risk exists if the Fed maintains its hawkish tone, with key resistance at 18.4950.
      • A break above 18.6000 could extend losses amid thin holiday liquidity.
    • Medium-Term:
      • Persistent SARB caution and attractive carry trade dynamics may support ZAR recovery in Q1 2025.
      • SA’s terms of trade and undervaluation provide a strong foundation for longer-term strength.

Global FX Trends

  • USD:

    • The USD Index remains buoyant at 107.40, with potential upside to 108.962 (key Fibonacci retracement).
    • A move beyond 110.00 could solidify USD dominance into early 2025.

  • EUR/USD:

    • Hovering near 1.0360, the pair faces pressure from dovish ECB policy relative to the Fed.
    • Technical support at 1.0300 may offer some reprieve.

  • GBP/USD:

    • Weakening sentiment on the BoE’s dovish shift and modest inflation gains has capped the GBP at 1.2655.
    • Further downside risks persist, with support at 1.2600.

  • USD/JPY:

    • After the BoJ’s decision, USD/JPY surged past 157.00, its largest daily gain since 2020.
    • Resistance looms at 158.00, with potential consolidation below this level into year-end.

Market Insight – Fixed Income

SA Bonds

  • Yield Trends:

    • SA bond yields rose in tandem with global benchmarks amid hawkish central bank guidance.
    • The SA 10-year spread to US Treasuries narrowed to 452bp, signaling modest investor caution.

  • Drivers:

    • Lingering inflation concerns and uncertainty over the February budget.
    • Anticipation of grey list removal and further GNU reforms could boost demand in early 2025.

  • Risks:

    • Fiscal liabilities (e.g., Eskom’s financial woes) and potential oil price rebounds pose medium-term challenges.

FRAs

  • Conservative Repricing:
    • 3X6 vs 3m JIBAR: -36bp, signaling one Q1 2025 rate cut.
    • 6X9 Spread: Narrowed to -52bp, indicating SARB caution through H1 2025.
    • 12X15 Spread: Compressed to -60bp, suggesting just two cuts in 2025, a sharp revision from earlier expectations.

Strategic Insights

Short-Term Focus

  1. Fed-Led FX Movements:

    • Watch for USD reactions to further hawkish Fed rhetoric, which could cap ZAR gains.
    • Monitor China’s policy measures for potential support to commodity currencies.

  2. ZAR Sentiment:

    • Near-term volatility likely to persist; liquidity constraints during the holiday season could amplify swings.

Medium-Term Outlook

  1. Fiscal Reforms:

    • February’s budget must address structural inefficiencies, especially in SOEs and municipal debt.
    • Progress on FATF grey list removal could further bolster investor confidence.

  2. Global Dynamics:

    • Divergent central bank policies will dominate FX and bond market dynamics into early 2025.
    • A potential soft landing for the global economy may support risk sentiment, aiding the ZAR and EM assets.

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