7 Nov

Daily Market Report 7 Nov

South Africa (SA) Key Points

  1. Fitch’s Skepticism on MTBPS: Fitch Ratings maintains a cautious outlook on South Africa’s fiscal trajectory, expressing doubts over the assumptions in the Medium-Term Budget Policy Statement (MTBPS). This skepticism focuses on growth forecasts seen as overly ambitious against high debt levels and structural economic challenges. Persistent doubts from rating agencies can contribute to increased borrowing costs and pressure on the ZAR, highlighting the importance of concrete steps toward fiscal consolidation.
  2. Sibanye’s Gold Earnings Surge: Sibanye-Stillwater’s Q3 results show a tripling of gold earnings, driven by elevated gold prices and internal efficiencies. This profitability is a positive for South Africa’s mining sector, which remains a vital pillar of the economy. High performance in the mining sector can buffer against other economic headwinds, although it also underscores dependence on commodity price trends.
  3. Municipal Water Crisis: The escalating municipal water issues present a growing risk to local economies and public health. This infrastructure challenge could impact productivity, deter investment, and exacerbate public discontent. Addressing this requires significant public investment, which strains already stretched fiscal resources.

U.S. Election Update and Immediate Market Impact

With vote counting underway, early results show Trump ahead with 205 electoral votes compared to Harris’s 117, though major Democratic strongholds have yet to report. Markets are reacting swiftly to these developments:

  • Stock Markets: U.S. stock futures surged as the possibility of a Trump victory sparked optimism among investors betting on pro-business policies, including tax cuts and deregulatory measures.
  • USD Strength: The dollar is rebounding, supported by a spike in U.S. Treasury yields. A Trump presidency will likely drive growth and attract capital inflows, strengthening the dollar in the short term.
  • Geopolitical Risks: While markets may benefit from specific economic policies, Trump’s return could introduce significant geopolitical shifts. His intentions to negotiate peace in conflict zones and exert pressure on vital international players (e.g., China and Iran) could trigger uncertainty. This adds to the allure of the USD as a safe-haven asset.

Market Insight – FX

USD-ZAR: The pair moved back up towards 17.8000, driven by the stronger USD amid early indications of a potential Trump win. Resistance levels remain at 17.8000 and 17.8650, while support is at 17.4780 and 17.3500. These levels will be tested based on incoming election results and subsequent market positioning.

Global FX Trends:

  • EUR/USD: The euro fell below 1.0750 due to the strength of the USD but has recovered slightly. A confirmed Trump victory could lead to further EUR/USD weakness as dollar strength continues.
  • GBP/USD: The pound faced similar pressures, slipping below 1.2900 before rebounding marginally. Future movements hinge on global market reactions and domestic Bank of England decisions.
  • USD/JPY: Volatility was high, reflecting shifts in safe-haven preferences and USD dynamics. The yen’s movement aligns with the uncertainty tied to U.S. political outcomes.

Market Insight – Fixed Income and Yield Curve

U.S. Treasury Yields: Yields rose sharply as investors priced in the inflationary and deficit-spending policies expected under the Trump administration. Tax cuts and increased tariffs could lead to higher inflation, complicating the Fed’s stance. The central bank, already expected to announce a 25bp rate cut tomorrow, may face pressure to slow further rate cuts if inflation risks mount.

SA Bonds: Domestic yields have remained relatively stable but may respond as more clarity emerges from U.S. election outcomes. Higher global yields could spill over into emerging markets, affecting local financing conditions.

FRAs:

  • The 1X4 FRA pricing indicates a 25bp rate cut by year-end, consistent with expectations of SARB accommodating growth. Spreads across 3X6, 6X9, and 9X12 vs. 3m JIBAR suggest multiple rate cuts into 2025, reflecting cautious optimism balanced by global risk.

Global Developments and Japanese Monetary Policy

Japan: Former BOJ board member Makoto Sakurai suggests the BOJ may initiate interest rate hikes in 2025, contingent on economic and wage growth conditions. Global market turbulence and domestic political pressures could complicate the gradual shift from ultra-loose policies. If the yen depreciates sharply, the BOJ might expedite policy adjustments, emphasizing the complex interplay between global influences and domestic economic needs.

Conclusion

  • South Africa: The Fitch outlook and infrastructure challenges point to the need for decisive fiscal and economic measures. Sibanye’s strong performance is a bright spot, but dependency on commodity cycles underscores vulnerabilities.
  • U.S. Election: The market’s response to early results reflects the high stakes and potential policy shifts tied to a Trump administration. Continued counting and eventual confirmation will likely trigger further volatility, especially in FX and fixed-income markets.
  • Global Economic Landscape: The anticipated Fed rate cut amid an inflationary risk under a Trump presidency, BOJ’s gradual shift and broader geopolitical implications will shape investment strategies in the coming months.

Investors should monitor updates closely as the situation evolves and be prepared for rapid shifts across asset classes depending on the election’s outcome and subsequent policy expectations.

 

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