31 Oct

Daily Market Report 31 Oct

  1. South Africa: MTBPS Takeaways and Fiscal Direction
  • MTBPS Highlights: The MTBPS confirmed that fiscal consolidation remains a top priority for the government, despite weaker-than-expected tax revenues. The National Treasury used conservative growth projections, keeping debt-to-GDP and budget deficit forecasts realistic. Additionally, the government’s funding strategy will involve tapping offshore markets, which should alleviate pressure on the local bond market.
  • Focus on Capital Investment and Private Sector: The MTBPS signaled an end to SOE bailouts while emphasizing a shift toward capital investment and private sector inclusion in infrastructure projects. With gross fixed capital formation at just 14.6% of GDP, well below optimal levels, infrastructure spending will require private sector participation. Examples like private involvement in Eskom’s capacity expansion demonstrate a potential blueprint for broader SOE collaboration.
  • Next Steps – February Budget: Investors expect further reform announcements in February’s main budget, especially if the government intends to implement structural changes. Given the constrained fiscal environment, reforms around SOE efficiency, infrastructure upgrades, and municipal sustainability will be crucial.

 

  1. ZAR Performance and FX Market Insight
  • Rangebound ZAR: The ZAR initially lost some ground post-MTBPS, but this reaction was largely overshadowed by a stronger USD following US labor market data. The ZAR soon returned to its pre-MTBPS range, showing limited reaction to the budget. Currently trading around 17.6750, with resistance at 17.8000 and support at 17.3500, the currency remains sensitive to global USD movements and domestic fiscal signals.
  • September Trade Balance: Investors await today’s trade figures, with consensus expecting the surplus to widen to +R9.1bn. An ongoing trade surplus would support economic growth and help offset fiscal challenges, lending the ZAR some resilience.

 

  1. Global Market Context
  • US Dollar and Election Dynamics: The USD has seen its largest monthly gain since April 2022, supported by economic resilience and speculation over a Republican victory in the upcoming US elections. The dollar index reached a technical resistance level at 104.719, and investors are cautious about pushing beyond this level amid upcoming US jobs data and election risk.
  • Eurozone and GBP Trends: The EUR/USD recovered to around 1.0850 following a surprise Eurozone GDP bounce, reducing the likelihood of a 50bp cut by the ECB in December. The British pound faced selling pressure after Finance Minister Rachel Reeves announced a plan to raise social security contributions. The Labour government aims to address fiscal gaps while supporting the struggling UK economy.
  • Japanese Yen Volatility: The JPY remains volatile after importers pushed demand near 153.00. The BoJ’s decision to hold rates unchanged at 0.25%, while maintaining a hawkish bias, has kept upward pressure on the USD/JPY.

 

  1. Fixed Income Market and Bond Dynamics
  • Bond Market Stability: Initial bond market weakness post-MTBPS was short-lived, as conservative budget assumptions reassured investors. SA bonds are set to end the week on a positive note, benefiting from the government’s continued emphasis on fiscal restraint and capital investment. With domestic inflation on a downward trend and the ZAR holding steady, the bond market outlook remains stable.
  • Yield Spread and US Treasuries: The spread between SA’s 10-year bond and US Treasuries sits above 500bp, indicating relatively strong investor confidence in SA’s fiscal outlook. Upcoming US non-farm payroll data and today’s PPI figures will be watched closely, with US Treasury yields likely to influence SA bonds.

 

  1. Global Bond Market and US Treasury Refundings
  • US Treasury Funding Needs: The US Treasury announced a $125 billion refunding from November to January 2025, including issuance of 10-year notes and 30-year bonds. The benchmark 10-year Treasury yield fluctuated yesterday amid strong US economic data, with the ADP report indicating private payroll growth and Q3 GDP expanding by 2.8%. This demand for US bonds may keep upward pressure on global yields, with implications for SA’s bond market.

 

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