30 Oct

Daily Market Report 30 Oct

 

1. South Africa: MTBPS and Fiscal Reform Prospects

  • MTBPS Significance: The MTBPS, South Africa’s second-most-important fiscal update, will serve as a platform for the GNU to demonstrate its commitment to economic stability and fiscal discipline. Investors are focused on the government’s strategy to balance social support initiatives like social grants and food security programs with the need for fiscal sustainability. While a boost in growth is expected from the end of load-shedding and improved infrastructure, these gains are unlikely to afford significant spending leeway.

  • Challenges and Opportunities: Without “silver bullets” to bolster revenue, the MTBPS will likely signal moderate GDP growth adjustments rather than a sweeping fiscal transformation. However, investors will watch closely for indications on the government’s spending priorities, including wage bill constraints and potentially recalibrated inflation targets. Any signs of greater private sector inclusion in economic reforms, such as SOE partnerships, could bolster market confidence and support the ZAR.

2. ZAR Performance and FX Market Insight

  • Rangebound ZAR: The ZAR remains rangebound at 17.7150, with resistance at 17.8000 and support around 17.3500. The currency is positioned to respond favorably if today’s budget provides positive signals on fiscal restraint and structural reforms. SARB Governor Kganyago has emphasized that prudent reforms could attract foreign capital, strengthen the ZAR, reduce inflationary pressures, and allow the SARB to ease interest rates further.

  • Importance of Stability for Portfolio Inflows: Stabilizing the bond market through a balanced MTBPS would provide the ZAR with resilience. Investor optimism around SA bonds, driven by attractive yields, hinges on concrete government action to reduce fiscal risk, prioritize infrastructure upgrades, and address challenges like municipal insolvency and export logistics.

3. Global Market Context

  • US Election and USD Strength: The USD has seen a 3.6% monthly gain, supported by market expectations of a Republican win in the upcoming US election, which could bring higher tariffs, inflation, and elevated Fed rates. The dollar index touched 104.63, underscoring demand for the USD as a safe haven amid election uncertainty.

  • Japanese Political Instability and Yen Impact: Following the LDP coalition’s loss of a parliamentary majority, the USD/JPY pair climbed above 153.00 in Asian trading, reflecting heightened yen volatility as markets speculate on potential Bank of Japan policy shifts amid political uncertainty.

  • Global Risk Sentiment: Persistent geopolitical tensions, particularly in Ukraine and the Middle East, maintain the USD’s safe-haven appeal, adding pressure to emerging market currencies like the ZAR. However, South Africa’s favorable yield differential offers some support, helping stabilize the currency.

4. Fixed Income Market and Bond Dynamics

  • Bond Market Resilience: Despite rising US Treasury yields, SA bonds have drawn interest from foreign investors, who anticipate a positive MTBPS with commitments to fiscal restraint. The spread between SA’s 10-year bond yield and US Treasuries has compressed to 501bp, indicating increased investor confidence in SA’s fiscal outlook. Any MTBPS signals of SOE reform and private sector collaboration in infrastructure could further support bond demand.

  • FRAs and Rate Cut Outlook: FRAs remain steady, reflecting investor caution ahead of the MTBPS. The 3X6 vs 3m Jibar suggests expectations for a 25bp SARB rate cut in November, while longer spreads indicate only moderate rate cut expectations, with the 12X15 spread positioning for three cuts over the current cycle.

5. Global Bond Market Trends and US Rate Expectations

  • US Election and Interest Rate Options: Ahead of the US election, swaptions trading suggests expectations for high rates, with markets anticipating a Republican win that could drive up tariffs and long-term interest rates. Implied volatility on 30-year swap rates has hit annual highs as investors position for potential shifts in fiscal policy and higher Treasury issuance.

 

Why Choose TreasuryONE?

Minimise the impact of market volatility on your bottom line by getting access to an experienced team of dealers that provides expert market advice – validated by facts and figures, not feelings or hearsay.

We customise risk management strategies to achieve the most competitive rates in a fast-moving and complex marketplace.

We provide effective and measurable processes for managing:

  • Exchange Rate Risk arises when an organisation conducts business in multiple currencies, either through exports and imports, or through foreign operations.

  • Commodity Price Risk is the financial risk posed to an entity’s financial performance and profitability by fluctuations in commodity prices that are primarily driven by external market forces and are therefore beyond the entity’s control.

  • Interest Rate Risk management for companies involves identifying, measuring, and managing the potential impact of changes in interest rates on a company’s financial position and profitability.