22 Nov

Daily Market Report 22 Nov

Markets React to SARB Rate Cut Amid Persistent Geopolitical and Economic Uncertainty

Talking Points

  • SA: SARB cuts the repo rate by 25bp to 7.75%, a widely anticipated move.
  • SA: Finance Minister warns that interventions for struggling municipalities are falling short.
  • SA: Kganyago signals that the inflation target review is nearing completion.
  • Global: Putin warns that the Ukraine war risks becoming a global conflict.

South Africa: SARB Rate Cut and Inflation Outlook

SARB Decision and Outlook

  • The South African Reserve Bank (SARB) delivered a 25bp cut, aligning with market expectations. Governor Lesetja Kganyago emphasized the unanimity of the decision, ruling out a 50bp cut, citing concerns over the sustainability of the recent inflation dip.
  • Inflation Forecasts:
    • Short-term inflation projections have been revised lower due to factors such as fuel deflation and easing food prices.
    • Long-term forecasts, however, were revised higher due to expectations of a substantial Eskom tariff increase (13.3% electricity inflation projected for 2025).
  • Future Rate Cuts:
    • Markets anticipate at least two more 25bp cuts by mid-2025, provided inflation remains subdued and reforms progress.
    • Further reductions beyond H1 2025 may be constrained by structural challenges and fiscal risks.

Reforms and Structural Constraints

  • Kganyago highlighted the importance of structural reforms to reduce economic inefficiencies and improve GDP growth. Without such reforms, high inflation and subdued growth could persist, limiting the scope for further monetary easing.
  • Municipal Challenges: National Treasury’s struggles to stabilize municipalities remain a drag on fiscal resources, adding pressure on government finances.

Market Insight – FX

ZAR Performance

  • Post-SARB Reaction:

    • The ZAR remained within its established range following the rate cut, with no major surprises to drive fresh direction.
    • SARB’s cautious and data-dependent tone has left the ZAR consolidating at 18.1150, awaiting external and domestic catalysts.

  • Geopolitical and Domestic Risks:

    • Global Factors: Uncertainty surrounding a potential Trump presidency, escalating Ukraine-Russia tensions, and Putin’s warnings of global conflict weigh on risk sentiment.
    • Domestic Challenges: Lingering municipal inefficiencies and Eskom’s tariff increases may continue to hinder confidence in SA’s economic trajectory.

  • Technical Levels:

    • Support: Immediate support lies at 17.8900, with a potential test of 17.8250 (50% Fibonacci retracement).
    • Resistance: Resistance is seen at 18.1250, followed by 18.1700, if SARB’s cautious outlook tempers market sentiment.

Global Context

Geopolitical Risks

  • Ukraine War: Ukrainian strikes into Russia, backed by US and UK, increase geopolitical tensions. Russian President Putin’s nuclear warnings exacerbate global risk aversion, benefiting safe-haven currencies like the USD.
  • Trump’s Potential Policies: Market uncertainties grow as Trump’s proposed tariffs, tax cuts, and reduced NATO funding could trigger inflationary pressures, potentially delaying Fed rate cuts.

USD Dynamics

  • Consolidation Phase:
    • The USD Index has stabilized above 106.00, with technical resistance at 107.07, as markets await clearer guidance on Trump’s fiscal policies and Fed easing.
  • Major Pairs:
    • EUR/USD: Range-bound between 1.0450-1.0650, constrained by large FX option expiries and muted ECB rate cut speculation.
    • GBP/USD: Sterling remains soft below 1.2600, with pound bears targeting 1.2573 as UK economic struggles persist.
    • USD/JPY: Yen saw a slight recovery to 155.00, driven by speculation of a potential BoJ rate hike in December.

Market Insight – Fixed Income

SA Bond Market

  • Post-MTBPS and SARB Decision:

    • Local bonds rallied following the SARB decision, reflecting optimism over falling inflation and expectations of further rate cuts.
    • The R209 yield dropped to its lowest levels since early October, highlighting strong demand.

  • Yield Spread Dynamics:

    • The spread between SA’s 10-year bond yield and the equivalent US yield compressed further to 456bp, a level that may be difficult to sustain without clear reform progress.

  • Reform Prospects:

    • Investors remain optimistic that the government will pursue reforms to address structural inefficiencies, bolster growth, and stabilize municipal finances.

Global Bond Markets

  • US Treasuries:
    • Yields remain elevated as inflation risks linked to Trump’s policies temper Fed rate cut expectations.
    • The Fed is expected to maintain a gradual approach to easing, balancing inflation risks with growth support.

FRAs

  • Post-Cut Adjustments:
    • FRA markets adjusted to price in another 25bp cut by Q1 2025.
    • The 6X9 spread to JIBAR compressed to -60bp, reflecting two cuts over the next six months.
    • Longer-term spreads suggest three rate cuts in total, with the SARB’s conservative bias limiting additional easing.

Strategic Insights

Near-Term Focus

  • SARB Policy Guidance: Governor Kganyago’s cautious tone underscores the SARB’s data-dependent stance, leaving room for additional easing but emphasizing the need for reforms.
  • Geopolitical Risks: Heightened tensions in Ukraine and uncertainties around Trump’s policies will weigh on risk appetite, limiting EM currency gains.

Long-Term Outlook

  • Reform Imperative:
    • South Africa’s economic prospects hinge on structural reforms, municipal stabilization, and improved governance.
    • Success in these areas could sustain bond market gains and strengthen the ZAR, reducing inflationary pressures.
  • Global Impacts:
    • If Trump’s policies spur inflation, delayed Fed easing may strengthen the USD, challenging EM currencies like the ZAR.

 

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