A brave GNU world for South African markets

The market has taken positively to the result of the newly formed government. The government of national unity (GNU) is by no means a smooth ride, as with any multiparty coalition. Differing ideologies and standpoints will no doubt cause volatility in the term ahead, as we have seen already with the formation of provincial governments. The cabinet has put on a bit of weight over these winter months with 32 ministers from 30 previously and 43 deputy ministers from 36 previously. Efficiency will be the only way to maximum bang for hard-earned taxpayer buck.

Against this global and local backdrop, the ZAR is likely to remain volatile in our new GNU era. A wide 17.8000 – 18.6500 range is expected to persist in the short to medium term. More strength can be expected in the longer terms as global rates come down and the ‘good news SA’ headlines continue. We’ve seen importers take advantage closer to the 18.0000 figure and exporters awaiting spikes back up to 18.5000 to hedge out longer dated forex exposure.  

The following themes are sure to impact our beloved Rattler:

• Local political stability, market policy reform and increased foreign investment.
• The US inflation and expected interest rate cutting cycle.
  
• Elections abroad

South Africa enjoyed strong foreign investment flow over the last month, with many foreign participants calling a market positive election result well before the GNU was finalised. The JSE saw an over 5% uptick over the last two months and SA bonds have also surged across the board. The ZAR has been the best performer among a group of leading emerging market currencies against the US dollar over the last month. This trend can improve further should we see positive SOE reforms coming from the GNU. Up to now it has mainly been ‘hot’ hedge fund inflows boosting local equity and bond markets. However, more investment from passive funds can be expected once tangible improvement from the GNU becomes apparent through positive growth or policy reform. Hard work has also gone into resolving the grey listing issues, which is expected to be cleared up as soon as the middle of next year.

The US Federal Reserve Bank is taking its cue from data releases before implementing the first potential interest rate cut. The US economy seems to be cooling, with inflation and labour numbers grinding downward. As of 10 July, the market was pricing in a 71% probability for the first rate cut to occur in September.

South African inflation has moderated from 5.6% in January to 5.2% in May 2024. Reserve Bank Governor Lesetja Kganyago has made it clear that the mandate of the MPC is still centred around managing inflation. It will be interesting to see if SA would be willing to cut prior to the US in the next two meetings. At the time of writing, the three-year interest rate swap market is currently trading at a 50bps discount to the prevailing three-month Jibar rate (8.34%). Clients can lock in these rates cut expectations and protect their debt repayments by entering three-year interest rate swaps at a 7.80% fixed rate.

After all the SA election excitement, the focus has now shifted back abroad. There are plenty of countries heading to the polls in the coming months. Political momentum has favoured the right leaning parties in the US and across Europe, whilst the pendulum in the UK has swung back left. The current results point to a coalition government in France. We’ve seen the USD and EUR gaining on the back of promises for lower tax reform and increased import tariffs. After the first US presidential debate, Trump was polling at 46% versus Biden’s 43%.  With a picture emerging of a ‘changing of the guards’, increased volatility and uncertainty can be expected across the financial markets.

The ZAR should see a push lower in the longer term. All in all, the new government is still at the starting blocks and will continuously be judged by voters and market participants alike as time goes by.