5 Nov

Daily Market Report 5 Nov

South Africa (SA) Developments

  1. Governance and Allegations: Former Treasury Director-General Dondo Mogajane’s resignation amidst bribery allegations (R1 million) signals potential governance challenges within the public sector. This might undermine investor confidence, especially given recent pressure on the National Treasury to demonstrate fiscal responsibility.
  2. Public Investment Corporation (PIC) as Healthcare Funding Source: The idea that National Treasury might look to the PIC for healthcare funding suggests increasing strain on public finances. However, while the PIC holds significant assets, tapping it for health reform could face legal and ethical scrutiny, as these funds are primarily for pension investments. This approach could deter investor trust if seen as diverting pension assets towards state bailouts or social spending.
  3. Panyaza Lesufi Investigation: The Democratic Alliance’s (DA) call for investigation adds another layer of political tension, which could impact policy continuity and investor confidence in South Africa’s legislative stability.
  4. PMI Data and Economic Growth Indicators: Standard Bank’s all-economy PMI has stayed above the 50.0 mark, signaling expansion. Factors contributing to this include eased load-shedding, rate cuts, and stronger ZAR performance. However, the economy still faces a challenging path to sustainable growth, as evidenced by Fitch’s cautious outlook. They consider the government’s GDP growth projections as overly optimistic, viewing current policies and structural issues as insufficient for rapid fiscal consolidation or robust growth.
  5. Credit Rating and Economic Stability: Although Fitch maintained SA’s BB- rating, their doubts over the government’s debt stabilization strategy underscore ongoing challenges. To improve the credit rating, the government must make further progress in fiscal consolidation and public-private investment partnerships. Getting off the Financial Action Task Force (FATF) greylist, possibly by mid-next year, would also be a positive step toward restoring investor confidence.

Market Insight – ZAR (South African Rand)

  • The ZAR remains stable against the USD, largely hovering around 17.50. Despite some weakness in the USD ahead of the U.S. election, the ZAR’s future movement will likely hinge on election results.
  • A Kamala Harris victory is expected to weaken the USD, potentially boosting emerging market currencies like the ZAR. Conversely, a Trump victory could strengthen the USD, pressuring the ZAR to fall.
  • Technically, USD-ZAR is showing resistance at 17.7000 and support at 17.4780 and 17.3500. These levels suggest some stability unless major shifts arise from U.S. election outcomes or unexpected domestic data.

Global Markets and U.S. Election

  • The U.S. election is highly contested, with outcomes anticipated to significantly influence global markets. Investors expect a Harris win to stabilize markets, as her policies are viewed as less disruptive. A Trump win could push yields and inflation higher, buoying the USD while potentially increasing volatility in risk assets.
  • The U.S. dollar softened slightly as polls indicated a narrow lead for Harris in key battleground states, adding uncertainty to the election’s impact on currency markets.

Fixed Income and Bond Markets

  • U.S. Treasuries: Yields are consolidating ahead of the election. The lack of a clear fiscal deficit plan from either candidate adds to defensive positioning in U.S. Treasuries. BRICs+ countries’ continued move away from U.S. Treasuries could also weigh on demand and drive yields up further if a decisive result isn’t achieved promptly.
  • SA Bonds: Demand at this week’s bond auction (R2033, R2038, R2040) will offer insight into domestic and foreign appetite for SA bonds. A strong auction could help contain yields, particularly as the market looks to gauge SARB’s rate cut trajectory in alignment with ZAR strength and inflation trends.

Foreign Exchange Market Movements

  • EUR/USD Options Expiry: Significant options expirations around EUR/USD 1.0850 and 1.0900 should contain substantial volatility. Any unexpected U.S. election outcomes could challenge these levels, particularly if market perceptions of currency stability or Fed policy shift.
  • GBP/USD Stability: The pound remains above 1.2950, partly driven by a recent bond market sell-off following the Labour budget. BoE’s expected 25 bps rate cut could align with Fed’s policy, supporting current GBP/USD levels as markets await election news and the BoE’s strategic response.
  • USD/JPY Consolidation: With Japanese market participants back from a long weekend, the yen remains range-bound as traders await election clarity.

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