24 Dec

Daily Market Report 24 Dec

 

SA Secures Agoa for Another Year Amid Broader Uncertainty

 

Talking Points

  • SA: Agoa benefits secured for 2025, but Trump’s upcoming presidency may impose stricter scrutiny.
  • SA: ZAR under pressure, ending the year weaker against the USD after earlier gains in 2024.
  • SA: Grid limitations hinder the expansion of green energy production.
  • Global: US rate outlook continues to dominate FX and bond market dynamics globally.

2024 in Review

Global Macro Overview

  • Central Bank Easing: Major central banks, including the Fed, ECB, and BoE, shifted toward policy easing while maintaining a cautious approach to inflation.
  • US Economic Resilience: Expectations of a sharp slowdown proved exaggerated. US growth momentum reduced anticipated Fed rate cuts for 2025 to 150bps, with 100bps already delivered.
  • Geopolitical Shifts: Key elections globally ushered in protectionist, nationalist policies, impacting trade and inflation trajectories.

Looking Ahead to 2025

Economic Dynamics

  • Agoa’s Future Under Trump: The extension of Agoa benefits for another year offers relief to SA exporters, but future eligibility reviews under Trump are likely to involve stricter geopolitical considerations, especially regarding Russia and the Middle East.
  • US Fiscal Policies: Trump’s anticipated tax reforms, trade renegotiations, and government downsizing are expected to reshape global economic trends, driving higher volatility.
  • Green Energy Challenges: SA’s constrained grid infrastructure remains a bottleneck for renewable energy growth, requiring targeted investments.

Central Bank Policies

  • Fed: Cautious guidance signals fewer rate cuts in 2025, supporting the USD through rate differentials.
  • SARB: Likely to maintain its conservative stance, balancing inflation containment with fiscal risks.

Market Insight – FX

ZAR Outlook

  • Spot Rate: 18.5600
  • Range: 18.3950/6650

Key Drivers

  • Domestic: Grid limitations and fiscal risks weigh on ZAR sentiment despite Agoa extension.
  • Global: Rising US Treasury yields and reduced expectations for Fed rate cuts bolster the USD, pressuring EM currencies like the ZAR.

Short-Term Risks

  • Holiday Liquidity: Thin volumes may amplify ZAR volatility, with 18.7500 emerging as the next upside target if 18.6650 resistance is breached.

Medium-Term Outlook

  • The SARB’s cautious stance supports carry trade prospects for the ZAR.
  • Fiscal reforms and strategic investments in energy infrastructure are critical for sustaining ZAR stability in 2025.

Global FX Trends

  • USD: The USD Index remains strong, with a potential test of 108.54 and 110.00 in early 2025.
  • EUR/USD: Bearish momentum persists, with the pair targeting 1.0300 on further USD strength.
  • USD/JPY: Intervention threats stabilize the pair near USD/JPY157.00, but the BoJ remains dovish.

Market Insight – Fixed Income

SA Bonds

  • Yields: SA 10-year bond spread to US Treasuries compressed to 450bps, reflecting challenges in sustaining bond market gains without fiscal reforms.
  • Fiscal Risks: February’s budget must address grid constraints and escalating municipal debt to maintain investor confidence.

FRAs

  • 3X6 vs 3m JIBAR: -42bp, signaling one rate cut in Q1 2025.
  • 6X9 Spread: -54bp, reflecting the likelihood of two cuts in H1 2025.
  • 12X15 Spread: Stabilized at -60bp, signaling fewer cuts amid ZAR pressures.

Strategic Insights

Short-Term Focus

  • Liquidity Risks: Thin holiday trading conditions heighten ZAR volatility, requiring cautious positioning.
  • Trump’s Inauguration: Monitor trade policies and geopolitical developments post-inauguration for potential disruptions.

Medium-Term Strategy

  • Fiscal Reforms: February’s budget must detail concrete plans for tackling municipal inefficiencies and supporting energy investments.
  • Energy Investments: Expanding grid capacity is vital for renewable energy growth and economic sustainability.
  • Global Dynamics: Divergent central bank policies and US fiscal strategies under Trump will drive financial market trends in 2025.

 

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