6 Nov

Daily Market Report 6 Nov

South Africa (SA) Updates

  1. Fitch Skepticism on MTBPS Forecasts: Fitch Ratings’ doubts about South Africa’s Medium-Term Budget Policy Statement (MTBPS) growth forecasts highlight concerns over SA’s path to fiscal sustainability. The agency views National Treasury’s projections as overly optimistic, particularly given structural challenges and the high levels of public debt. This skepticism could deter investor confidence and lead to higher borrowing costs, as investors weigh the risks of deteriorating fiscal health.

  2. Sibanye’s Q3 Gold Earnings Surge: Sibanye has seen a significant boost in Q3 gold earnings, tripling them due to strong gold prices and operational efficiencies. This uptick underscores the mining sector’s resilience amid global uncertainties and could provide a much-needed boost to South Africa’s GDP, particularly as other sectors face headwinds. However, the volatility of commodity prices and the challenges of operational costs mean this growth may not be sustainable in the longer term.

  3. Growing Municipal Water Crisis: Municipal water shortages are emerging as a critical issue in South Africa. This persistent infrastructure challenge not only affects daily life but can stifle productivity and deter investment in affected regions. Addressing these problems requires substantial public investment, which is increasingly difficult given fiscal constraints. The crisis serves as a reminder of the infrastructure deficit that hampers South Africa’s long-term growth potential.

U.S. Election Update and Market Reaction

As vote counting progresses, early results suggest that Trump is performing better than anticipated, leading in electoral votes with 205 compared to Harris’s 117. However, major states like California and New York—likely to favor Harris—remain uncounted. This has fueled what’s known as the “Trump trade,” with markets anticipating a continuation of Trump’s policies if he wins, which could mean higher growth in the short term but also potentially inflationary pressures.

  • Market Reactions:

    • Stocks: U.S. stock futures surged as investors positioned for a “pro-business” Trump administration. A Trump win is expected to bolster corporate profits and could drive a market rally, as his policies generally favor deregulation and lower taxes.
    • U.S. Dollar (USD): The USD has strengthened, fueled by both higher Treasury yields and a flight to safety amid uncertainties. Investors view Trump’s stance as supportive of economic growth, but also potentially disruptive geopolitically, leading to increased demand for the dollar as a safe-haven currency.
    • Treasury Yields: Yields on U.S. Treasuries spiked, reflecting expectations of potentially inflationary policies, such as tax cuts and increased tariffs, which would likely raise the cost of imports. The longer-term impact could complicate the Fed’s monetary stance, as the central bank would need to balance inflation pressures with any further rate adjustments.

  • Geopolitical Considerations: Trump’s potential return could shift U.S. foreign policy, with promises to reshape military commitments, pressure China, and pursue unconventional negotiations with North Korea and Iran. These moves may create a less predictable global environment, increasing safe-haven flows into the USD but potentially stoking volatility in emerging markets.

Market Insight – Foreign Exchange (FX)

  1. USD-ZAR:

    • The USD-ZAR pair has surged, trading above 17.8000 as the USD benefits from expectations of a Trump victory. The ZAR’s recent strength appears to be wavering under the pressure of global uncertainties, with resistance levels at 17.8000 and further at 17.8650.
    • If Trump solidifies his lead, the USD could gain further, likely pushing USD-ZAR higher. Alternatively, if Harris gains traction, the ZAR could benefit from a softer USD, with support levels at 17.4780 and 17.3500.

  2. Global Currencies:

    • EUR/USD: The euro fell sharply below 1.0750, with traders dumping the currency amid the USD’s rally. If Trump wins, expect further downside for the euro as markets pivot to USD-dominated trades.
    • GBP/USD: Sterling saw volatility, dipping below 1.2900 but rebounding slightly. The pound’s movement is more influenced by the global dollar dynamics than by domestic factors, with the Bank of England’s upcoming rate decision also in focus.
    • USD/JPY: Extreme volatility has been seen as traders react to U.S. election developments. The yen’s movements reflect a balancing act between its safe-haven appeal and USD strength.

Market Insight – Fixed Income and FRAs

  • U.S. Treasury Yields: The yield curve has shifted higher on speculation of inflationary fiscal policies if Trump wins. Higher yields signal that investors anticipate increased bond issuance to fund potential tax cuts, raising inflation concerns.

    • Fed Policy: The Fed’s anticipated 25bps rate cut may now be under scrutiny if Trump’s policies prompt further inflation. Despite calls for a “soft landing,” an inflationary environment could constrain the Fed’s ability to keep easing rates, which would affect both short-term and long-term yields.

  • SA Bonds: Local bonds are awaiting guidance from the U.S. election results. Should the ZAR continue to weaken, domestic bond yields may also rise, affecting South Africa’s ability to service debt at favorable rates.

  • Forward Rate Agreements (FRAs): The market is now positioned for two 25bp rate cuts before the year ends and possibly more in 2025. A weaker ZAR might lead to paying interest in FRAs, with spreads widening as investors price in additional easing cycles from the South African Reserve Bank to support the economy.

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