21 Oct

Daily Market Report 21 Oct

SA’s BRICs Alignment: South Africa’s growing alignment with the BRICs+ group (Brazil, Russia, India, China, and others) is becoming more pronounced. This shift reflects SA’s strategic move toward emerging economies that are growing faster than their Western counterparts. By aligning more closely with these nations, SA seeks to capitalize on the economic power that BRICs+ is expected to wield in the coming years, potentially surpassing the G7 in terms of global GDP growth by 2030.
Geopolitical Tensions: This geopolitical shift may put South Africa at odds with its Western trade partners, such as the US and EU, as it increases its ties with China, India, and Russia. One key friction area could be the AGOA deal (African Growth and Opportunity Act) with the US, which grants trade privileges. If political differences deepen, especially with the potential return of Donald Trump to the US presidency, maintaining these trade benefits could become challenging.

Inflation Outlook: The most critical domestic development this week is the release of September’s CPI data, with expectations for headline inflation to decline to 3.8% y/y. This would further support the SARB’s push toward lowering the inflation target. A downside surprise in inflation could give the SARB additional space to reduce interest rates in the coming months, aligning more closely with its lower inflation target strategy.
Rate Cut Expectations: The SARB’s potential to lower the inflation target to around 3% would signal a more conservative monetary policy in the short term but could support long-term lower interest rates. This would be a positive development for the ZAR, helping to curb its depreciation over time and reducing volatility. Investors are already expecting a 25bp rate cut in November, with further cuts contingent on inflation trends.

FX Market: The ZAR has found some stability, trading around 17.6200 after recent volatility. Global factors, such as US dollar strength driven by strong retail sales and elevated US bond yields, have kept the USD resilient. However, the USD rally seems to be reaching a point of exhaustion, and any signs of slowing in the US economy could offer the ZAR an opportunity to recover.
Impact of BRICs Alignment on the ZAR: While the BRICs summit and SA’s geopolitical stance may not immediately impact the ZAR, the shift away from Western partners could influence long-term trade dynamics. If SA’s economic ties with BRICs+ continue to strengthen, it may open new trade and investment channels but could complicate relations with Western countries, especially if tensions with the US grow.

Bonds and Inflation Data: The bond market will take cues from the September inflation data, with expectations of a further decline in inflation providing a supportive backdrop for SA bonds. The 10-year bond spread over US Treasuries has remained around 520bp, reflecting the carry trade appeal of SA bonds. A lower inflation print would reinforce expectations of more rate cuts, benefiting bondholders.
Conservative Rate Cut Outlook: The FRA curve is pricing in a 25bp rate cut in November, but the likelihood of additional cuts has been reduced. The market now expects three full 25bp cuts by the end of 2025, down from four previously, reflecting a more cautious stance by the SARB. However, if inflation continues to trend lower, there may be room for additional rate cuts.

China and BRICs Influence: China’s recent 25bp rate cut underscores its efforts to stimulate growth in the face of a slowing economy. This move is consistent with BRICs+ countries’ efforts to rebalance global trade dynamics away from the West and reduce reliance on the USD. In the medium term, a stronger BRICs+ bloc could provide SA with new economic opportunities, especially in terms of trade and investment flows from China and India.
US Dollar Strength: While the USD remains strong, driven by higher US Treasury yields and solid economic data, the dollar’s rally appears to be slowing. This offers potential relief for the ZAR, especially if US data softens or Trump trades trigger shifts in the market. The USD’s near-term outlook may hinge on PMI data and any developments in the lead-up to the US election.