Daily Market Report 23 Dec

Taking Stock of 2024 and Looking Ahead to 2025

Talking Points

SA: President Ramaphosa calls for the full implementation of the Bela Act.
SA: Municipal financial woes deepen as debt owed by households and government departments soars.
SA: Nersa delays its electricity tariff hike decision until January.
Global: Trump claims Putin seeks an urgent meeting to negotiate on Ukraine.

2024 in Review

Global Macro Overview:
- Inflation dominated early 2024, compounded by geopolitical tensions (Ukraine, Israel) and uncertainty surrounding elections worldwide.
- Central banks began cautiously prioritizing growth over inflation, leading to synchronized global rate cuts.
- US Resilience: Contrary to expectations of a deep slowdown, the US economy proved resilient. As a result, Fed rate cut expectations for 2025 were revised downward from 225bps to 150bps, with 100bps already delivered.
Key Shifts:
- Elections: Right-leaning policies gained traction, emphasizing nationalism, fiscal conservatism, and trade protectionism.
- Geopolitical Risks: Ongoing wars and protectionist policies raised uncertainty, impacting commodity prices and inflation globally.

Looking Ahead to 2025

Economic Dynamics:
- US Policy Under Trump:
  - Promises of tax cuts, government downsizing, and trade renegotiations will create economic and geopolitical ripple effects.
  - Tariffs might serve as leverage for trade deal renegotiations rather than punitive measures.
- Central Bank Policies:
  - The Fed’s cautious guidance indicates fewer cuts in 2025, potentially stabilizing inflation and supporting gradual growth.
  - Divergent monetary policies will drive FX markets, with the USD benefiting from rate differentials.
- Risks and Opportunities:
  - Fiscal reform will be a central theme in advanced economies, with emerging markets (including SA) needing structural reforms to attract investment.

Market Insight – FX

ZAR Outlook

Spot Rate: 18.2800; Range: 18.10/4350.
Key Drivers:
- Domestic challenges include municipal financial instability, political friction within the GNU, and Nersa’s delayed tariff decision.
- Internationally, USD strength driven by higher US rate expectations continues to pressure the ZAR.
Short-Term Risks:
- Political instability linked to GNU tensions, such as disagreements over the Bela Act, could undermine recent ZAR gains.
- Low holiday liquidity may exacerbate volatility, with resistance at 18.4350 and support at 18.1000 providing key trading markers.
Medium-Term Outlook:
- SARB conservatism and attractive carry trade opportunities could support the ZAR in early 2025.
- Successful fiscal reforms and progress on SA’s grey list removal are critical to sustaining investor confidence.

Global FX Trends

USD:
- The USD Index fell sharply following benign US PCE inflation data, but its broader strength persists.
- Technically, a break above 108.962 could see the index test the 110.00 level in early 2025.
EUR/USD:
- EUR/USD trades below its 5- and 21-DMAs, with bearish momentum intact. A sustained break below 1.0460 could target the year-to-date low near 1.0300.
GBP/USD:
- Support at 1.2475 has held firm despite the dovish BoE stance. Resistance looms at 1.2670, with year-end volatility likely to stem from positioning adjustments.
USD/JPY:
- The yen remains vulnerable as the BoJ holds rates steady. Resistance at 157.00, with support at 153.14, will guide near-term moves.

Market Insight – Fixed Income

SA Bonds

Municipal Debt Crisis:
- Consumer debt to municipalities soared by R80bn in 2024, totaling R386.5bn by September.
- Households owe 71.8% of this, with government departments accounting for 6%. This could spill over into SOE finances, including Eskom.
Fiscal Risks:
- As provinces like the Free State and Mpumalanga struggle with unemployment and weak growth, municipal inefficiencies will weigh heavily on fiscal stability.
- February’s budget will be critical for addressing these issues and maintaining investor confidence.

FRAs

Expectations:
- The FRA curve reflects increased caution:
  - 3X6 vs 3m JIBAR: -36bp, signaling a Q1 2025 rate cut.
  - 6X9 Spread: -53bp, indicating two rate cuts in H1 2025.
  - 12X15 Spread: -60bp, suggesting two cuts in 2025 as SARB remains conservative.

Strategic Insights

Short-Term Focus

Political Stability:
- Monitor GNU dynamics, particularly around contentious issues like the Bela Act, for potential ZAR volatility.
Holiday Liquidity:
- Expect thin trading volumes to amplify market moves, increasing risks for speculative ZAR trades.

Medium-Term Strategy

Fiscal Reforms:
- February’s budget must tackle municipal inefficiencies and SOE liabilities to bolster confidence.
- Progress on grey list removal will further support SA markets.
Central Bank Divergences:
- Focus on Fed guidance for 2025 to assess USD strength and its impact on ZAR competitiveness.

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Exchange Rate Risk arises when an organisation conducts business in multiple currencies, either through exports and imports, or through foreign operations.
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