25 Nov

Daily Market Report 25 Nov

Trump’s Choice of Bessent Eases US Treasury Yields and Pressures the USD

Talking Points

  • SA: Employers owe R5.0bn in pension arrears, highlighting fiscal vulnerabilities.
  • SA: Parliament to grill the economics cluster on fiscal sustainability and reform progress.
  • SA: Black Friday and end-of-month data will shape market sentiment.
  • Global: Stock markets rally as US Treasury yields and the dollar retreat.

Global Context: Stabilising Markets Amid Trump’s Pick and China’s Easing

Key Developments

  1. Trump’s Treasury Secretary Pick:

    • The nomination of Scott Bessent as Treasury Secretary has calmed investor fears of aggressive fiscal expansion and economic disruption.
    • Known for his moderation and financial expertise, Bessent is expected to advocate for fiscal discipline, balancing tax cuts with expenditure reductions.

  2. China’s Liquidity Injection:

    • The People’s Bank of China injected $124bn into the banking system via one-year policy loans, addressing liquidity concerns.
    • This proactive move underscores China’s focus on maintaining economic stability, which bodes well for SA as China remains its largest trading partner.

  3. US Markets: Conservative Outlook:

    • A shift in US rate cut probabilities reflects a more cautious economic outlook, with the next Fed rate cut expected only in March 2025.
    • The US Treasury yield curve has flattened, indicating investor caution over Trump’s potential fiscal policies.

Market Insight – FX

ZAR Performance

  • Post-Bessent Reaction:

    • The ZAR regained some ground against the USD, supported by easing US Treasury yields and improved risk appetite.
    • Trump’s pick of a market-savvy Treasury Secretary reduced fears of fiscal excess, providing relief to emerging market currencies.

  • Technical Levels:

    • Support: Immediate support at 17.8900, with further downside potential toward 17.8250 (50% Fibonacci retracement).
    • Resistance: Near-term resistance lies at 18.1250, followed by 18.1700, if risk sentiment wanes.

  • Outlook:

    • SARB’s conservative monetary stance and expectations of gradual Fed easing provide support for the ZAR.
    • However, geopolitical risks, including tensions in Ukraine and Trump’s policy uncertainty, may limit the ZAR’s upside.

Global FX Trends

  • USD Index: Retreating from a two-year high of 108.09, the dollar is under pressure as investor sentiment improves.
  • EUR/USD: Hovering near parity, weighed down by diverging economic and monetary policy dynamics between the US and eurozone.
  • GBP/USD: Sterling remains fragile after disappointing UK PMI and retail sales data, struggling around 1.2475.
  • USD/JPY: The yen stabilized near 155.00 as speculation grows over a potential BOJ rate hike in December.

Market Insight – Fixed Income

SA Bond Market

  • Performance:

    • SA bonds extended gains for the fourth consecutive day, with yields falling to levels last seen in early October.
    • The rally reflects optimism over SARB’s rate cut and expectations of reforms to bolster fiscal stability.

  • Key Developments:

    • The SA 10-year yield spread over US Treasuries compressed to 456bp, signaling confidence in SA’s relative fiscal positioning.
    • However, unfunded liabilities and slow reform implementation remain key risks to sustained bond market gains.

Global Bond Markets

  • US Treasuries:
    • Yields declined on news of Trump’s Treasury pick and strong PMI data, reflecting a cautious outlook for fiscal policy.
    • The Fed’s measured approach to rate cuts, amid inflation risks, continues to support yields.

FRAs

  • Adjustments Post-Rate Cut:
    • The 3X6 spread to JIBAR narrowed to -31bp, signaling expectations of another rate cut in January.
    • The 6X9 spread widened to -47bp, reflecting market anticipation of two rate cuts in H1 2025.
    • Longer-term outlook: FRAs reflect reduced expectations for additional rate cuts beyond H1 2025.

Strategic Insights

Near-Term Focus

  1. Trump’s Policies:

    • Markets will closely monitor the impact of Trump’s fiscal and trade policies, including potential tariffs and tax reforms.
    • Bessent’s appointment may ease concerns in the short term but could limit market complacency if fiscal discipline wanes.

  2. SA’s Economic Cluster in Parliament:

    • Policymakers face tough questions on unemployment, fiscal reforms, and growth initiatives.
    • Investors will look for signs of progress on FATF greylist removal, municipal stabilization, and SOE efficiency improvements.

  3. Data Events:

    • Black Friday and month-end data releases, including trade and credit figures, will shape sentiment for SA markets heading into December.

Long-Term Outlook

  • SA Reforms:
    • Continued focus on SOE revitalization, private sector inclusion, and fiscal restraint will be critical to sustaining bond market gains and ZAR resilience.
  • Global Risks:
    • Heightened geopolitical tensions and potential inflationary pressures under Trump’s administration may delay Fed easing, supporting the USD and challenging EM currencies.

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