Daily Market Report 5 Mar

Daily Market Report 5 Mar

ZAR Holds Ground Despite US Business Cycle Concerns & Budget Uncertainty

Key Developments

  • South Africa:
    • Q4 GDP Recovers Slightly: GDP rises to 0.6% q/q, driven by agriculture, trade, and finance.
    • GNU Debates VAT Increase: Talks of a smaller VAT hike as an alternative to funding shortfalls.
    • Board of Healthcare Funders Challenges NHI: Requests Ramaphosa’s records on National Health Insurance.
  • United States:
    • Business Cycle Maturity Evident:
      • Post-pandemic stimulus effects fading, limiting consumer spending.
      • Liquidity pressures rising as the Fed continues quantitative tightening ($2.3 trillion withdrawn).
      • Government overspending (6% deficit of GDP) has masked economic fragility.
    • Stock Market Sell-Off Wipes Out Post-Trump Election Gains:
      • Investors brace for prolonged market volatility as tariff impact sets in.
      • Concerns over US growth trajectory intensify.
  • Global:
    • US Dollar Faces Pressure:
      • Safe-haven appeal limited as US growth weakens.
      • Fed rate cut expectations increasing, adding downside risks.
    • Canada, Mexico, & China Retaliate Against US Tariffs:
      • Mexico to announce countermeasures by Sunday.
      • EU responds cautiously but prepares for economic impact.

Market Insight – FX

  • ZAR Performance:
    • Spot: 18.4600 | Range: 18.3000 – 18.6000
    • Key Drivers:
      • USD Weakness Continues: The US no longer enjoys “exceptionalism” as GDP slows & fiscal tightening looms.
      • Risk Appetite Falling: Higher market volatility limits ZAR gains, despite USD softness.
      • Budget & VAT Uncertainty: If GNU fails to produce a credible budget, ZAR could see a negative reaction.
  • Risks:
    • Stock Market Volatility: A deeper US sell-off could trigger further risk aversion in EM currencies.
    • Uncertain Fiscal Policy in SA: Without firm decisions on VAT or expenditure cuts, investor confidence may falter.
  • Global FX Trends:
    • USD Index: 105.62, weaker but supported by tariff-related safe-haven flows.
    • EUR/USD: 1.0637, holding gains as Germany expands borrowing plans.
    • GBP/USD: 1.2788, consolidating ahead of BoE testimony on rate policy.
    • USD/JPY: 149.88, remains stable as speculators bet on BoJ tightening.

Market Insight – Fixed Income

  • US Treasuries & Global Bonds:
    • US 10-Year Yield Drops to 4.13%: Investors position for slower growth & Fed rate cuts.
    • Fed Rate Cut Expectations Increase: Markets now price in 3 rate cuts by 2025, boosting bond demand.
  • SA Bonds & FRAs:
    • Foreign Investor Sentiment:
      • SA-US Yield Spread at 657bp: Making SA bonds attractive for carry trade.
      • Budget Clarity Needed: If fiscal consolidation measures are clear, bonds may rally.
    • FRAs Reflect Growing Rate Cut Bets:
      • 3X6 FRA: 18bp cut priced in.
      • 6X9 FRA: 25bp cut expected for Q3.
      • 9X12 FRA: 33bp cut, suggesting SARB could ease further.

Outlook:

  • ZAR Could Weaken If:
    • Budget Announcement Fails to Impress: Uncertainty over VAT & fiscal discipline could undermine sentiment.
    • US Growth Slows Further: More stock market declines could trigger risk-off flows, weighing on EM currencies.
  • ZAR Could Strengthen If:
    • US Economic Data Worsens: Weaker PCE inflation or jobs data could accelerate Fed rate cut bets.
    • SA Budget Shows Fiscal Responsibility: If wasteful expenditure is reduced, it could restore confidence.
  • Key Levels to Watch:
    • Support: 18.3000, with a break below targeting 18.0000.
    • Resistance: 18.6000, if risk-off sentiment rises.

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