3 Dec

Daily Market Report 3 Dec

 

Trump Tariff Threat Fizzles as Investors Turn to Data for Direction

 

Talking Points

  • SA: Ramaphosa vows to engage President-elect Trump constructively amid trade tensions.
  • SA: Standard Bank observes no evidence of two-pot withdrawals reducing consumer debt.
  • SA: November car sales hit a 20-month high, reflecting improved consumer sentiment.
  • US: S&P 500 climbs to new highs on Trump optimism and strong manufacturing data.

Domestic Developments: GDP in Focus Amid Resilient Economic Data

Mixed Economic Signals

  1. Manufacturing PMI Weakens:

    • Absa’s PMI slid into contractionary territory at 48.1 pts in November (Oct: 52.6 pts), reflecting weaker business activity and demand.
    • Sub-indices like new sales orders (45.9 pts) and employment (46.9 pts) declined, though future expectations remain buoyant at 62.3 pts.

  2. Car Sales Surge:

    • November domestic vehicle sales rose 8.1% y/y, driven by rising passenger vehicle sales (+20% y/y) and base effects from a weak prior year.
    • Export sales contracted -28.6% y/y, but rising domestic demand signals improving household confidence.

  3. Q3 GDP in Focus:

    • GDP is expected to improve from Q2’s modest growth (0.4% q/q, 0.3% y/y) due to:
      • Political stability and a stronger ZAR.
      • Falling inflation and lower interest rate expectations.
      • The absence of load-shedding boosting productivity.
    • Despite short-term gains, structural reforms are critical to sustaining growth.

Government Finances: Fiscal Reforms Needed

  • The main budget deficit widened to -R302.1bn YTD (vs. -R293.0bn in 2023).
  • SA must either reduce bloated expenditures or accelerate GDP growth by attracting private sector investments and liberalising network industries.

Market Insight – FX

ZAR Outlook

  • Trump’s Tariff Threat Lacks Substance:

    • While Trump’s rhetoric on imposing 100% tariffs on BRICs+ countries created initial uncertainty, its practical implications are limited.
    • A BRICs+ currency remains theoretical, with significant barriers to adoption and liquidity generation in global markets.

  • Rangebound Trading:

    • The ZAR remained stable near 18.1550, with no major catalysts to drive a breakout.
    • Today’s Q3 GDP data and upcoming US non-farm payrolls will shape near-term ZAR direction.

  • Key Levels:

    • Support: 17.9550 (38.2% Fibonacci retrace).
    • Resistance: 18.2650, protecting further topside moves.

Global Drivers

  1. USD Momentum:

    • The USD continues its 6% rally since September, driven by optimism over Trump’s policies and strong US manufacturing data.
    • Speculative net long positions on the dollar stand at $23.6bn, nearing levels that historically precede reversals.

  2. Cross-Currency Trends:

    • EUR/USD: Bearish sentiment dominates, with options expiries limiting downside movement for now.
    • GBP/USD: Sterling consolidates around 1.2635, pressured by European political uncertainty.
    • USD/JPY: Narrowing Japan-US rate differentials keep the yen anchored below 150.00.

Market Insight – Fixed Income

SA Bond Market Trends

  1. Steady Yields:

    • Domestic bonds consolidate as investors digest mixed local data and await Q3 GDP results.
    • Softer inflation (PPI deflation) supports rate cut expectations, with the FRA market pricing in three rate cuts through 2025.

  2. Fiscal Pressures:

    • The widening budget deficit highlights the urgent need for fiscal reforms.
    • Investors will watch GDP data closely for indications of whether SA can grow out of its fiscal constraints.

FRAs

  • Receiving Interest Continues:
    • The 3X6 vs 3m JIBAR remains at -33bp, signaling a likely 25bps rate cut in January.
    • Longer spreads suggest the possibility of three rate cuts in 2025, though the ZAR’s performance and fiscal stability remain key risks.

Global Bonds

  • US Treasuries Stabilise:
    • Yields held steady, with 10-year Treasuries at 4.197%, after Fed Governor Christopher Waller signaled support for a December rate cut.
    • The yield curve flattened slightly, balancing optimism from strong economic data with dovish Fed commentary.

Strategic Insights

Short-Term Focus

  1. GDP and Labour Data:

    • SA’s Q3 GDP data today and US non-farm payrolls later this week will guide near-term sentiment for the ZAR and global markets.

  2. USD Strength:

    • The USD’s rally remains intact, but speculative positioning suggests limited upside before a potential correction.

Long-Term Outlook

  1. Structural Reforms:

    • SA must focus on addressing fiscal inefficiencies, liberalising industries, and improving governance to sustain investor confidence.

  2. Global Risks:

    • Trump’s policies and geopolitical tensions will keep global risk appetite volatile, impacting emerging market currencies like the ZAR.

 

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