28 Nov

Daily Market Report 28 Nov

ZAR on the Defensive as Investors Grapple with Trump’s Policy Implications

Talking Points

  • SA: IMF urges South Africa to adopt bolder fiscal measures to stabilise debt.
  • SA: Support for SARB’s call for a lower inflation target continues to grow.
  • SA: IMF recommends implementing a stronger fiscal anchor to manage debt levels.
  • CH: CNY hits record lows as pressure builds on fears of US tariff threats.

Domestic Developments: Balancing Fiscal Reform and Monetary Prudence

IMF Commentary on SA

  1. Fiscal Policy Recommendations:

    • The IMF advocates for a debt ceiling, highlighting the need for a fiscal anchor to curb rising public debt.
    • “Absent additional reforms, public debt is expected to continue rising,” the IMF noted, flagging risks from state-owned enterprises (SOEs) and underwhelming consolidation measures in the MTBPS.

  2. Inflation Targeting:

    • The IMF supports SARB’s proposal for a lower inflation target, emphasizing long-term economic benefits:
      • Lower inflation would improve real purchasing power and consumer confidence.
      • Gradual implementation would minimize short-term output losses.

  3. Household Pressures:

    • Rising living costs are evident in the decline of medical aid coverage, now at 14.7%, down from 16% in 2000, as households prioritize essential expenses.

Upcoming Data Focus

  1. PPI Data (Today):

    • Producer price inflation slowed to 1.0% y/y in September, the lowest since June 2020.
    • Fuel deflation will continue driving lower PPI readings, though other cost pressures (e.g., infrastructure decay, administered prices) may limit further declines.

  2. Money Supply (Tomorrow):

    • Expected to show a marginal acceleration, reflecting tight credit cycles and limited inflationary pressures.

Market Insight – FX

ZAR Outlook

  • Performance:

    • The ZAR slipped further against the USD, reflecting geopolitical uncertainties around Trump’s policy directions and the broader risk-off sentiment.
    • China’s economic struggles and record-low CNY levels are amplifying concerns for commodity-linked currencies like the ZAR, AUD, and NZD.

  • Technical Levels:

    • Support: Immediate support is at 18.0900, with stronger congestion at 17.9600 (38.2% Fibonacci retracement).
    • Resistance: On the upside, 18.3950 remains a key level if bearish sentiment persists.

  • Outlook:

    • While domestic improvements (e.g., IMF backing for reforms, fiscal prudence) could bolster the ZAR in the long term, short-term sentiment hinges on external factors, particularly US-China relations and Trump’s tariff policies.

Global Context: Tariffs, Currency Pressures, and Risk Sentiment

Key Developments

  1. Trump’s Tariff Policy:

    • Announced 10% tariffs on China and 25% tariffs on Canada and Mexico, sparking fears of a global trade war.
    • MXN (-1%) and CAD (-0.9%) saw immediate declines, with the USD Index holding above 106.00.

  2. CNY Pressure:

    • The CNY hit record lows amid mounting concerns about China’s economic slowdown, exacerbated by trade uncertainties.
    • Weak industrial profits (-10% y/y in October) and a struggling real estate market add to downside risks.

  3. Eurozone Stability:

    • French bond yields spiked amid political and fiscal tensions. The spread over German yields rose to 90 basis points, its highest since the eurozone debt crisis.

Market Insight – Fixed Income

SA Bonds

  • Performance:

    • SA bond yields rose slightly on the back of a weaker ZAR and cautious SARB outlook.
    • The 10-year spread over US Treasuries widened to 479bp, with expectations of settling above 500bp as global yields ease.

  • Key Drivers:

    • SARB’s monetary conservatism and tight credit cycles support bond demand.
    • IMF’s fiscal recommendations (e.g., debt ceiling, fiscal anchor) could enhance long-term bond market resilience.

Global Bonds

  • US Treasuries:
    • Yields dipped amid mounting concerns of a global economic slowdown and rising expectations for another Fed rate cut.
    • December and January Fed meetings now see 60% and 80% probabilities, respectively, for further easing.

Strategic Insights

Near-Term Focus

  1. IMF-Supported Reforms:

    • Implementation of fiscal anchors and inflation targeting could enhance investor confidence, supporting the ZAR and bond market.

  2. Trump’s Tariff Risks:

    • Near-term volatility is likely, with trade tensions driving safe-haven flows to the USD and weighing on EM currencies.

  3. Data Releases:

    • Today’s PPI and tomorrow’s money supply data will shape the SARB’s inflation outlook, influencing market expectations for further rate cuts.

Long-Term Outlook

  • Structural Reforms:

    • Tackling SOE inefficiencies and adopting stronger fiscal measures are crucial to debt stabilization and sustainable growth.

  • Global Uncertainties:

    • China’s slowdown, US tariff policies, and French fiscal tensions pose risks to global markets and commodity-linked currencies like the ZAR.

 

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