28 Oct

Daily Market Report 28 Oct

 

1. South Africa: MTBPS and Fiscal Reform Expectations

  • MTBPS as a Fiscal Indicator: The MTBPS will give critical insights into Finance Minister Godongwana’s approach to government spending, fiscal discipline, and private sector collaboration. Investors will look closely at growth forecasts and the government’s plans to foster economic resilience without cutting essential spending. Although this is not a policy-setting event, any indication of credible fiscal reforms would support market confidence and the ZAR.

  • Potential Inflation Target Shift: There is speculation that the National Treasury, in collaboration with the SARB, is considering a lower inflation target. While any formal change may be postponed until the main budget in February, even a mention of this would align SA with global inflation targets, enhancing long-term stability for the ZAR and improving bond market sentiment.

2. ZAR Performance and FX Market Insight

  • ZAR Stability: Despite the USD’s strength, the ZAR has held steady, trading around 17.7150 with resistance at 17.8000 and support at 17.3500. This stability may reflect investor caution ahead of the MTBPS, where fiscal reforms and inflation management signals could reinforce the ZAR’s position. SARB Governor Kganyago has highlighted that fiscal reforms could attract foreign capital, strengthen the ZAR, reduce inflation, and give the SARB more leeway for rate cuts.

  • Impact of Global Risk Appetite: The ZAR’s resilience depends partly on stable global risk sentiment. Countries with credible fiscal outlooks tend to suffer less negative speculation during geopolitical or macroeconomic stress, which could become critical if market volatility increases ahead of the US elections.

3. Global Market Context

  • US Election and USD Dynamics: The USD remains elevated due to a tight election race between Trump and Harris. A potential Trump victory could bring higher tariffs and inflation, leading the Fed to keep rates elevated, adding support for the USD. In October, the USD gained over 3%, with US bond yields nearing three-month highs, reflecting safe-haven appeal amid election uncertainty.

  • Japan’s Political Shift and Yen Impact: Japanese markets are adjusting to the LDP coalition’s loss of its parliamentary majority, a shift that could influence the Bank of Japan’s (BoJ) policy direction. The USD/JPY surpassed 153.50 in Asian trading, with yen bears dominating. Market volatility around the yen is expected to persist as investors consider potential BoJ policy adjustments.

  • Geopolitical Tensions and Safe-Haven Demand: Continued conflicts in Ukraine and the Middle East have dampened global risk appetite, strengthening the USD’s safe-haven appeal. While this environment pressures the ZAR, South Africa’s favorable yield differential helps maintain some support for the currency.

4. Fixed Income Market and Bond Dynamics

  • SA Bond Market Recovery: SA bonds showed resilience last week, even as US Treasury yields rose. Foreign interest in SA’s high-yield assets has bolstered bond performance. The MTBPS will be pivotal in sustaining this momentum, as investors assess the government’s commitment to expenditure restraint and economic growth support.

  • FRAs and Rate Cut Outlook: FRAs are stabilizing ahead of the MTBPS, with the 3X6 vs 3m Jibar indicating expectations for a 25bp rate cut in November. Spreads further out indicate a lower likelihood of consecutive rate cuts, with the 12X15 spread now reflecting three expected cuts over the current cycle, down from four.

5. Global Bond Market Trends and BoJ Outlook

  • Bank of Japan Policy Signals: The BoJ is expected to keep interest rates ultra-low at its next meeting but may signal a shift toward a less dovish stance to curb yen depreciation. Rising wages and higher prices in Japan could lead to future rate hikes, which would impact global bond yields and currency markets.

 

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