Get more Investec Focus insights straight to your inbox
The oil price rose to US$75.5/bbl today (Brent crude) as risk aversion climbed in the markets on the incoming vote count in the US showing Donald Trump in the lead, then expected to be the next President, and finally winning the election.
The rand weakened to R17.78/USD today from R17.11/USD yesterday, then subsided somewhat to R17.61/USD, before returning to R17.76/USD and the oil price dropped to US$74.3/bbl as markets digested the news.
A rise in risk aversion resulted in rand weakness, while the US dollar gained, both on safe haven flows and anticipated higher inflation in the US leading to a shallower US rate cut cycle, with limitations now on further US interest rate cuts.
The FOMC is set to meet tomorrow, with financial markets pricing in a 99% chance of a -25bp cut, while expectations at the next FOMC meeting (December 18th) are lower, at only 69% or less, chance of another (December) interest rate cut in the US this year.
This expectation, of two -25bp cuts in the US this quarter has dipped from 83% on Monday, as markets now factor in the implication of a Trump Presidency, leading to US dollar strength (on higher US rates for longer), and so rand weakness.
Heavy tariff increases on imports, especially from China, are expected, slowing China’s growth, but intended to bolster US growth and employment under an onshoring policy where industrial production is envisioned to rise in the US.
Onshoring (industrial production returns to the home country, here the US from China as one example), is expected to bolster industry, create new jobs and eventually lift US growth, quickening US inflation, along with the impact of tariff hikes.
Higher tariffs in the US, and retaliation saw trade wars (countries the US trades with instituted higher tariffs on goods from the US) under the previous Trump presidency, adding to inflationary pressures, with deglobalisation and worries over global growth.
The oil price has benefited on the Trump win, with sanctions on Iran expected to be intensified, and so impacting supply, while demand rises on filling US’s strategic reserves, but a Republican Presidency is expected to weaken climate commitments.
Geopolitical tensions are expected to escalate in the Middle East on increased support for Israel under the incoming Trump presidency, while the Republican win in the Senate is also expected to place pressure on SA’s Agoa renewal.
Agoa is a piece of US legislation, and not a bilateral treaty, and as such does not have room for negotiation. Instead, strict criteria are applied for membership, with the Republican’s Donald Trump having said to wish to relook support to Africa.
SA’s interest rate cut cycle could risk being shallower than expected, as inflation is supported by higher global oil prices, less rand strength than anticipated, especially on a smaller US cut cycle, and higher imported inflation.
A shallower US rate cut cycle, with robust economic growth in advanced readings for Q3.24, and the noticeable drop in core PCE deflator’s inflation key reading, has already moderated the near-term outlook for the US interest rate cycle.
US ten-year treasury (bond) yields have consequently risen on the moderation in market expectations (and expected further moderations) for the US interest rate cut cycle, to 4.44% from 4.39% yesterday, with US tax cuts expected for corporates.
SA bond yields would rise on anticipation of a slower SA interest rate cut cycle, given a lift in domestic inflation expectations, while slower global growth (stemming from a trade war) would negatively impact SA’s growth as well, and trade revenues.
The international oil price is key for SA’s petrol price, which is priced in US dollars, along with rand US dollar exchange rate, and a further petrol price hike is building for December now, after the fuel price increase in SA this week.
While US growth is expected to eventually accelerate under Donald Trumps’s Presidency, concerns are for a year or two the economy could falter as it takes a lengthy period for industry to be built up as onshoring gets under way.
Additionally, US unemployment is already low historically, despite having seen a modest uptick in recent months, while US inflation has come from a lengthy elevated environment and US rates are high, all of which provide risks for the outlook.
Browse further in