6 Dec

Daily Market Report 6 Dec

Narrow Current Account Deficit Calms ZAR Nerves Amid Global Uncertainty

Talking Points

  • SA: Finance Minister Godongwana confirms state interventions prevented an S&P downgrade for Transnet.
  • SA: SAA pilots strike, stranding passengers amidst wage disputes.
  • SA: Current account deficit narrows slightly to -1% of GDP in Q3.
  • Global: OPEC+ considering a delay in oil production increases to balance market dynamics.

South Africa: Current Account Deficit Narrower, But Challenges Persist

Q3 Current Account Deficit

  • Deficit Performance:

    • Narrowed to -R70.8 billion in Q3 from -R75.3 billion in Q2.
    • As a percentage of GDP, the deficit improved to -1% from -1.5% in Q1 2024.

  • Trade Surplus Decline:

    • Fell slightly to R177 billion from R179.5 billion in Q2.
    • Decline reflects lower export and import volumes due to global economic headwinds.

  • Services and Income Deficit:

    • Improved for the second consecutive quarter, narrowing to -R247.8 billion from -R254.7 billion in Q2.

Key Takeaways

  • Market Reaction:

    • ZAR remained resilient, with yesterday’s data aiding its performance.
    • ZAR/USD is threatening to break below the 18.0000 handle as the current account deficit is manageable by historical standards.

  • Structural Challenges:

    • Improvement largely driven by weak domestic demand and reduced dividend payouts rather than economic robustness.
    • Persistent reliance on external financing leaves SA vulnerable to global market shifts.

Economic Context

  • Reform Imperatives:

    • Privatization and efficiency improvements in SOEs like Transnet are critical to reducing economic inefficiencies.
    • Interventions to prevent S&P downgrades, such as with Transnet, highlight the state’s fragile fiscal position.

  • Inflation Targeting:

    • The SARB’s conservative approach signals potential adjustments to inflation targets.
    • Fiscal reforms will be crucial in supporting lower inflation and maintaining fiscal credibility.

Market Insight – FX

ZAR: Steady Despite Challenges

  • USD-ZAR Outlook:

    • Spot at 18.0250, with a range of 17.89/18.1800 for the day.
    • The ZAR’s strength reflects the manageable current account deficit and expectations of a weaker USD following potential soft US labour data.

  • Factors Supporting ZAR:

    • Narrower deficit eases concerns over external imbalances.
    • Broader risk-off sentiment subsided, offering the ZAR some breathing room.

Global FX Dynamics

  • USD Index:

    • Holding above 106.00, awaiting non-farm payroll data today for direction.
    • A soft reading could weigh on the USD and push UST yields lower.

  • EUR/USD:

    • Stabilized around 1.0570, supported by market adjustments following political instability in France.

  • GBP/USD:

    • Continued recovery, trading above 1.2700, supported by easing dollar strength.

  • JPY:

    • Remains below 150.00, with tight trading ranges as markets await US data.

Market Insight – Fixed Income

SA Bonds: Navigating Fiscal Challenges

  • Auction Insights:

    • Focus shifts to today’s ILB auction, with breakeven rates providing insights into inflation expectations.
    • Bonds remain stable, supported by manageable current account data and moderate ZAR volatility.

  • Fiscal Concerns:

    • Government’s reliance on interventions, such as with Transnet, highlights the urgency for structural reforms.
    • Privatization and leveraging the private sector are seen as necessary steps to bolster fiscal sustainability.

FRAs

  • Consolidated Expectations:
    • 3X6 vs 3m JIBAR: Held at -32bp, signaling another 25bp rate cut in January.
    • 6X9 spread to JIBAR: At -61bp, reflecting expectations of two rate cuts in H1 2025.
    • 12X15 spread: Widened to -73bp, with the potential for three cuts next year.

Global Bond Trends

  • French Debt Risks:
    • Political instability led to a narrowing of the risk premium on French debt over German Bunds to 80.6 basis points from Monday’s peak of 90 bps.
    • Uncertainty persists, with President Macron expected to appoint a new prime minister amid limited fiscal flexibility.

Strategic Insights

Short-Term Drivers

  1. US Non-Farm Payrolls:

    • Weak data could spark USD weakness, supporting the ZAR.
    • Labour market resilience remains a key indicator for Fed rate decisions.

  2. ILB Auction:

    • Outcomes will offer clues on inflation expectations and fiscal health.

Long-Term Considerations

  1. Reform Agenda:

    • Successful privatization and SOE reform are critical for sustainable economic growth.
    • February’s budget will be pivotal in demonstrating fiscal commitment.

  2. Global Risk Sentiment:

    • Developments in France, US labour market data, and OPEC+ decisions will shape global markets in the near term.

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