20 Nov

Daily Market Report 20 Nov

South Africa (SA)

  1. Electricity Market Reform:

    • Amendment Act Implications: The Electricity Regulation Amendment Act will permit traders and aggregators to enter SA’s electricity market. This reform is expected to improve competition, drive investment, and enhance energy supply stability. However, municipal resistance could slow its rollout.
    • Market Impact: Successful integration of new participants could bolster economic growth by providing a more reliable power supply, improving industrial output and investor confidence.

  2. Construction Industry Protection:

    • Historic Agreement: The state has signed a landmark agreement to curb the “construction mafia” disrupting projects. This move should secure project timelines and reduce costs, fostering a more reliable environment for infrastructure development.
    • Economic Significance: Strengthening the construction sector is crucial for boosting employment and growth in associated industries. Ensuring uninterrupted project execution can accelerate infrastructure plans critical for long-term growth.

  3. Two-Pot Retirement System Fees:

    • Potential Costs: Administrative fees for the two-pot system could exceed R1.25bn in the first six months. This raises concerns about the system’s efficiency and the financial burden on consumers.
    • Implications: Excessive fees could deter participation and reduce potential benefits for savers, highlighting the need for stringent oversight to protect the integrity of retirement savings.

Market Insight – FX

ZAR Analysis:

  • Current Performance: The ZAR is trading at approximately 18.0550 after rebounding from recent lows and dipping below key support at the 17.9600 mark. It remains sensitive to geopolitical events, particularly developments related to Russia-Ukraine tensions and US politics.
  • Outlook for Volatility: The currency’s resilience is being tested by global risk aversion, driven by Russia’s hints at a nuclear response and speculation surrounding Trump’s potential influence on NATO and the Ukraine conflict. This uncertainty makes clear directional moves difficult to establish, as risk appetite shifts between periods of caution and optimism.
  • Support and Resistance: Immediate support lies at 17.8900, with potential for a deeper test towards 17.8250 (50% Fibonacci retracement). Resistance around 18.1250 and 18.1700 could limit short-term gains.

Key Drivers:

  • Geopolitical Risk: Heightened tensions over Ukraine and Russia’s nuclear stance have injected risk-averse sentiment, anchoring the USD and supporting its safe-haven status.
  • Local Factors: Domestic inflation data, expected to show a decline to 3.0% y/y in October, will play a critical role ahead of the SARB’s rate decision. A rate cut is widely anticipated, but the SARB’s guidance on future policy will be pivotal for the ZAR’s trajectory.

Global Context

  1. Trump’s Position on Ukraine and NATO:

    • Potential Policy Shifts: Trump’s call for negotiations over military escalation and his potential impact on NATO funding could alter the geopolitical landscape. This introduces uncertainties for the US’s global alliances and its role in ongoing conflicts, impacting market sentiment.
    • Market Reaction: If Trump’s stance gains traction, it could lead to a reassessment of US foreign policy expectations, affecting global risk appetite and currency movements, particularly in emerging markets.

  2. USD Performance:

    • Support Amid Tensions: The USD Index remains anchored above 106.00, reflecting its safe-haven appeal amid geopolitical concerns. A reversal toward 105.00 is possible if risk aversion eases or if market focus shifts to economic fundamentals over geopolitical fears.
    • Euro and Pound Outlooks: The EUR remains under pressure, with the risk of further declines if the ECB opts for aggressive rate cuts. The GBP has steadied, supported by expectations around upcoming UK inflation data and potential impacts on BoE policy.

Market Insight – Fixed Income

Bond Market Dynamics:

  • SA Bond Resilience: Despite the ZAR’s recent depreciation, SA bonds have remained largely steady, with the spread between SA 10-year and US 10-year yields below 470bps. This tight spread suggests significant divergence could be on the horizon: either US yields stabilizing or SA bond yields drifting higher to restore the premium.
  • Auction Results: The recent vanilla bond auction highlighted cautious sentiment, with lower bids (R11.62bn) compared to prior weeks. This suggests that geopolitical uncertainties, particularly post-Trump’s election, are contributing to risk-off behavior.

Key Considerations:

  • Rate Decision and Inflation Data: The SARB’s MPC meeting, with expectations for a 25bp rate cut, is likely priced into the market. Investors will focus on the SARB’s future guidance and the inflation outlook, which could influence bond yields and the ZAR.
  • Global Yield Environment: US Treasury yields have retreated slightly but remain elevated. This ongoing trend points to fiscal and geopolitical pressures in the US, which may affect the global bond market and emerging market flows.

Forward-Looking Insights

ZAR and Emerging Market Currencies:

  • Risk Management: Investors should brace for potential volatility, given geopolitical uncertainties and the upcoming SARB decision. Any shifts in global sentiment, such as developments in the US or Russia-Ukraine tensions, could lead to swift movements in the ZAR and other EM currencies.
  • Domestic Reforms: Continued progress on domestic issues like the Electricity Regulation Amendment Act and securing infrastructure from criminal disruption will be key for sustaining investor confidence and long-term currency stability.

Global Developments:

  • Geopolitical Watch: Investors should monitor the evolving situation in Ukraine and any signals from Trump or NATO regarding policy changes. These developments could impact risk sentiment, global safe-haven flows, and currency movements.

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