Daily Market Report 4 Nov
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Civil Servant Wage Negotiations:
- Background: Finance Minister Enoch Godongwana’s 4.7% wage offer has set the stage for contentious wage negotiations. Unions are likely to demand higher raises, citing rising living costs, while the government aims to balance fiscal sustainability.
- Market Insight: The potential for unrest in public sector wage negotiations could impact investor sentiment. A settlement higher than the offered 4.7% would strain the national budget, affecting debt levels and bond yields.
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JSE and Eskom Delay Probe:
- Status: Eskom’s ongoing audit and financial probe has led the JSE to issue a warning of potential suspension. This underscores transparency and accountability issues within the state utility.
- Market Impact: Prolonged financial irregularities at Eskom could negatively affect investor confidence in state-owned entities and, by extension, the JSE. Any sign of further instability in Eskom might pressure the ZAR, with spillover effects on bond yields due to debt risk perceptions.
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Consumer Shifts Toward Premium Purchases:
- Trend: South African consumer behavior shows signs of returning to premium goods, a potential signal of improving consumer confidence.
- Implications: This trend, though positive, may signal growing price elasticity in the market. A shift back to premium purchases could improve retail sector performance but risks being sensitive to any renewed economic challenges.
United States (US)
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Presidential Election and Market Uncertainty:
- Tight Race: Polls are neck and neck between Trump and Harris, adding to market unpredictability. Historically, Trump’s economic policies leaned toward deregulation and tax cuts, potentially strengthening the USD. However, his protectionist stance could also add trade tensions, impacting global markets.
- Market Impact: Should Trump win, we might see a short-term boost for the USD. Conversely, Harris is expected to favor a moderate approach, which markets might view as a continuation of current policies with potentially mixed impacts on the USD. The split results in Congress could dampen market moves, as it implies legislative gridlock.
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Federal Reserve Rate Decision:
- Anticipated Cut: A 0.25% rate cut is expected, bringing the target range to 4.5-4.75%. The Fed’s recent rate path reflects caution, with an intent to avoid excessive economic cooling.
- Investor Focus: Markets have already priced in the cut, so the Fed’s forward guidance will be pivotal. Any dovish outlook on additional cuts could weaken the USD and improve emerging market currencies like the ZAR.
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Market Dynamics and USD Performance:
- USD-ZAR Range: The ZAR’s current positioning around 17.5150 faces resistance at 17.7000, with downside support at 17.4780 and further at 17.3500.
- Scenario: A Trump win could buoy the USD but may introduce volatility due to policy uncertainties. Harris’s win would likely keep the USD under pressure, benefitting the ZAR in the short term.
Global Markets
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EUR and GBP Insights:
- Euro Strength: Aided by improved investor sentiment, the EUR/USD hit an intra-day high of 1.0900 in early trading, signaling positive near-term technicals.
- British Pound Outlook: The UK’s Labour-led tax-and-spend budget may boost inflation expectations, compelling the BoE to adopt a more hawkish policy. GBP/USD is approaching 1.3000, signaling a stable outlook barring unexpected market events.
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Japanese Yen Dynamics:
- Yen Performance: Thin liquidity due to a Japanese public holiday has led to slight yen appreciation, hovering at around 151.60 against the USD. Investors expect a continued sell-off of the yen on rallies, especially given the BoJ’s recent commitment to a hawkish stance if inflation persists.
Market Insight – Fixed Income
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US Treasury Yields and Fiscal Uncertainty:
- Rising Yields: The 10-year yield edged up to 4.39% due to rising fiscal concerns and potential future budget deficits under both US presidential candidates. The Fed’s balance sheet reduction also contributes to upward pressure on yields as market demand must now absorb additional bond supply.
- Comparison with SA Bonds: The spread between SA’s 10-year bonds and US Treasuries has narrowed to 495bps, its lowest in over a decade, reflecting increased US fiscal risk relative to SA. This suggests resilience in SA bonds due to the perceived fiscal prudence outlined in the MTBPS, which could continue if the ZAR remains stable.
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FRAs and Rate Cut Expectations:
- SA FRA Market: The SA FRA curve has adjusted based on anticipated rate cuts, with markets currently pricing in three 25bp cuts over the next year. These cuts are contingent on ZAR stability and further clarity on inflation and SARB’s policy stance.
- Fed Rate Outlook: Fed fund futures indicate five potential cuts through December 2025. Given recent US economic data and fiscal uncertainties, markets are watching this week’s Fed statement for any indication of an accelerated cut trajectory.
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