7 Jan

Daily Market Report 7 Jan

 

Talking Points

  • SA: ArcelorMittal announces the closure of its long-steel business in Newcastle, KZN, citing low prices and competition from China.
  • SA: BER calls for urgent reforms to fix municipal governance to boost investment and growth.
  • SA: President Ramaphosa signs into law a 15% global minimum corporate tax for multinationals.
  • Global: US tariffs under Trump may be more focused but still pose inflation and trade risks.

2024 in Review

Global Macro Overview

  • Geopolitical Shifts: Trump’s election and anticipated tariffs have heightened trade tensions, with expectations for significant global policy changes.
  • SA’s De-industrialization: ArcelorMittal’s decision reflects SA’s ongoing industrial decline, exacerbated by labour market challenges and uncompetitive local policies.
  • Mixed Local Data: The S&P Global SA PMI fell to 49.9, the first contraction in four months, underscoring weak sentiment despite GNU optimism.

Key Shifts

  • Municipal Failures: Poor service delivery and decaying infrastructure at the local level are critical constraints on SA’s growth and investment potential.
  • Labour Market Concerns: Weak job creation and business closures reflect structural challenges SA must address to stabilize its economy.

Looking Ahead to 2025

Economic Dynamics

  • SA Reforms: The upcoming SONA and February budget offer key opportunities for President Ramaphosa to implement reforms, attract private sector capital, and broaden the tax base.
  • Global Trade Risks: Trump’s tariff plans could disrupt global trade, impacting SA’s export competitiveness.
  • Labour Market Trends: US labour data, including the JOLTS report and non-farm payrolls, will influence global risk sentiment and USD trends.

Central Bank Policies

  • Fed: Cautious rate cut schedule expected, with market pricing suggesting one cut by mid-2025 and another by year-end.
  • SARB: SARB remains conservative, with only two rate cuts expected in 2025 to balance inflation risks against the weak ZAR.

Market Insight – FX

ZAR Outlook

  • Spot Rate: 18.5800
  • Range: 18.42/7400

Key Drivers

  • Domestic: Weak PMI data and de-industrialization underscore SA’s structural challenges, weighing on the ZAR.
  • Global: USD strength driven by elevated US Treasury yields and cautious Fed guidance continues to pressure EM currencies, including the ZAR.

Short-Term Risks

  • Resistance: Yesterday’s highs around 18.7400 provide immediate resistance for the USD-ZAR.
  • Support: Previous lows at 18.4100 will act as critical support.

Medium-Term Outlook

  • Municipal reforms and local service delivery improvements are essential to restoring investor confidence and supporting the ZAR.
  • Global trade developments under Trump’s presidency will drive broader risk sentiment and FX trends.

Global FX Trends

  • USD: DXY remains near 109, supported by Fed caution and resilient US economic data.
  • EUR/USD: The Euro faces bearish momentum, with parity looming amid weak Eurozone data and delayed ECB rate cuts.
  • GBP/USD: The pound recovered slightly but remains vulnerable to UK growth concerns and underpriced BoE rate cut risks.
  • USD/JPY: The yen remains sensitive to BoJ guidance, with support from potential rate hikes later in 2025.

Market Insight – Fixed Income

SA Bonds

  • Spreads: The SA 10yr-US 10yr yield spread compressed to 441bps, the tightest since 2013, signaling relative weakness in SA bond attractiveness.
  • Outlook: Further tightening of spreads could increase pressure on SA bond yields unless domestic reforms and growth prospects improve.

FRAs

  • 1X4 FRA to 3m JIBAR: -24bp, signaling a rate cut in Q1 2025.
  • 3X6 Spread: -37bp, reflecting cautious optimism for further cuts in early 2025.
  • 12X15 Spread: -47bp, indicating only two cuts likely for 2025 as SARB adopts a measured approach.

Strategic Insights

Short-Term Focus

  • Economic Reforms: SONA and February budget will be critical for setting the tone on economic recovery and structural reforms.
  • US Data: JOLTS and non-farm payroll data will provide key signals for Fed policy and USD trends, with potential implications for the ZAR.

Medium-Term Strategy

  • Municipal Performance: Improving local governance and service delivery will be pivotal in attracting investment and driving growth.
  • Energy and Industry: Addressing grid capacity issues and supporting industrial competitiveness will be key to reversing de-industrialization trends.
  • Global Risks: Monitor Trump’s tariff strategy and US-China trade tensions for potential disruptions to global and local markets.

 

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