29 Oct

Daily Market Report 29 Oct

1. South Africa: MTBPS and Economic Indicators

  • MTBPS Outlook: The MTBPS, scheduled for release this Wednesday, will provide important updates on South Africa’s fiscal policy, spending priorities, and growth projections. Investors are focused on whether Finance Minister Godongwana will emphasize fiscal responsibility, encourage private sector involvement in capital projects, and signal reforms to strengthen SA’s fiscal position. While the MTBPS typically doesn’t involve policy shifts, any signals of credible fiscal reforms could improve investor sentiment and support the ZAR.

  • Inflation Target Speculation: There is speculation that National Treasury, in line with the SARB, is considering a lower inflation target. Although a formal decision may wait until the main budget in February, mention of this shift would align SA with global standards and support ZAR stability by promoting long-term price stability.

2. ZAR Performance and FX Market Insight

  • ZAR Stability: The ZAR remains rangebound, with resistance at 17.8000 and support around 17.3500. This stability reflects investor caution ahead of the MTBPS, where fiscal reforms and a potential inflation target shift could bolster the ZAR. SARB Governor Kganyago has emphasized that credible reforms would attract foreign capital, appreciating the ZAR, reducing inflation, and allowing the SARB to ease interest rates further.

  • Credit Demand and Inflation Impact: The release of September’s money supply figures will provide insight into credit demand and inflationary pressures. Should credit demand remain weak, inflation could surprise to the downside, opening more space for SARB rate cuts. This could improve the fiscal outlook and further support the ZAR.

3. Global Market Context

  • US Election and USD Dynamics: The USD has experienced its strongest monthly gain in over two years, rising 3.6% as economic strength and US election dynamics bolster yields. Markets anticipate that a Trump presidency might introduce higher tariffs, inflation, and elevated Fed rates, keeping the USD strong. The dollar index recently hit 104.57, with traders positioning for possible GOP control of Congress and the White House, underscoring safe-haven demand amid election uncertainty.

  • Japanese Political Instability and Yen Impact: In Japan, the LDP coalition’s loss of its parliamentary majority raises questions over the Bank of Japan’s (BoJ) policy direction. The USD/JPY climbed above 153.50 in Asian trading, reflecting market volatility as investors speculate on BoJ policy adjustments amid political uncertainty.

  • Global Risk Sentiment and Safe-Haven Demand: With ongoing tensions in Ukraine and the Middle East, the USD continues to attract safe-haven inflows. This risk-aversion environment pressures emerging markets like the ZAR, but SA’s yield differential provides some support, helping to stabilize the currency.

4. Fixed Income Market and Bond Dynamics

  • SA Bond Market and Foreign Interest: Despite rising US Treasury yields, SA bonds have been resilient, attracting foreign portfolio inflows. Investors appear to anticipate a positive MTBPS with indications of fiscal responsibility. The spread between SA’s 10-year bond yield and US Treasuries has compressed to 501bp, nearing a decade low and reflecting increased investor confidence in SA’s fiscal stability.

  • FRAs and Rate Cut Prospects: FRAs are rangebound as investors await the MTBPS. The 3X6 vs 3m Jibar suggests a 25bp SARB rate cut in November, while longer-term spreads indicate lower odds of consecutive rate cuts. The 12X15 spread positions for three cuts over the current cycle, down from four, reflecting conservative expectations amid fiscal uncertainty.

5. Global Bond Market Trends and ECB Outlook

  • ECB Rate Cut Debates: The European Central Bank (ECB) is facing internal debates on rate cut timing, with Belgian central bank chief Pierre Wunsch cautioning against premature easing. With some policymakers advocating for a gradual approach, Wunsch anticipates inflation reaching target by mid-2025, supporting the case for patient, data-driven rate cuts.

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