The local political landscape took centre stage this week, with markets celebrating the newly formed Government of National Unity (GNU) and the swearing-in of President Cyril Ramaphosa. The question to be asked, as we revel in this financial rally, is whether we are counting our chickens before they have hatched.
Key themes:
- A new dawn for South Africa?
- United States (US) 10-year yields bounce off three-month lows
- Heightened geopolitical fears in the Middle East support oil prices
- Johannesburg Stock Exchange (JSE) soars to near-record highs following a broader rally
DOES THE GNU HAVE LEGS?
Last week marked a significant turning point for South Africa as the newly formed GNU held its first parliamentary sitting. This political development has been met with an overwhelmingly positive response from financial markets, indicating a renewed sense of optimism about the country’s future. The rand, the JSE, and the bond markets all saw substantial gains, reflecting investor confidence in the potential for economic reforms and stability.
The rand appreciated notably, reaching its strongest levels in 11 months after experiencing significant volatility around the election period. This strengthening momentum was largely attributed to the peaceful formation of the GNU, which eased investor concerns about political fallout.
Equities also experienced a significant boost, with the JSE-All Share Index climbing 2.75% on Tuesday. The bond market followed suit, with the yield on the 10-year government bond dropping below 10%, its lowest level since March, highlighting renewed optimistic sentiment towards South African government debt, fuelled by the favourable political climate.
The upbeat market response suggests a strong investor belief in the GNU’s ability to implement much-needed reforms. These include measures to curb state debt, address power shortages, and fix logistical issues that have plagued the country’s economy. The exclusion of radical parties advocating for land expropriation and nationalisation of key industries has further bolstered investor confidence.
Foreign investors, who had been net sellers of South African shares for an extended period, also showed renewed interest. The FTSE/JSE Africa All Share Index emerged as the best performer among 92 global equity benchmarks tracked by Bloomberg, surging by up to 3.5%. Leading the charge were banks, insurers, and retailers, with notable gains from companies like financial services firms, Old Mutual and First Rand, pharmaceutical, health and beauty retailer, Clicks Group, and fashion retailer, Truworths.
This positive shift in market sentiment is widely expected to reignite capital inflows into South African equities. According to global ratings agencies, the new government’s agenda to prioritise structural reforms is seen as favourable for the economic and fiscal outlook, as represented in the gains in both the local currency and bonds. The yield on benchmark government bonds fell to 11.46%, the lowest since early February, indicating strong investor demand at recent government bond auctions.
Following the inauguration of President Ramaphosa, the focus now shifts to his cabinet appointments. These choices will be crucial in determining the new government’s ability to deliver on its reform promises. Investors will, in particular, be keen to see how the GNU will navigate potential tensions and policy differences, especially between the African National Congress (ANC) and the Democratic Alliance (DA).
Despite the positive outlook, challenges remain. The unified government must address South Africa’s deep-rooted economic woes, including high unemployment, inequality, and poverty. The GNU’s approach to these problems is expected to mirror the centrist policies of previous ANC-led governments, with an emphasis on private sector involvement and infrastructure development through initiatives like Operation Vulindlela, which is a joint initiative of the Presidency and National Treasury to accelerate the implementation of structural reforms.
There are also concerns that significant fundamental differences between GNU partners could lead to friction. The ANC’s commitment to affirmative action and Black Economic Empowerment (BEE) policies contrasts with the DA’s free-market stance. This ideological divide will test the GNU’s members’ ability to work together effectively. The contentious issue of land reform, in particular, could become a flashpoint, as the ANC and DA have vastly different views on addressing racial disparities in land ownership.
Foreign policy could also be a source of discord. The ANC’s alignment with countries like Russia and China contrasts with the DA’s preference for stronger ties with Western allies. This could lead to debates over South Africa’s role in international institutions like BRICS and its stance on global geopolitical issues.
For now, however, optimism is the order of the day, and with government cohesion and, dare we say, a little sheer luck, the next five years might prove fruitful for the embattled economy and social fabric. Investors are optimistic about the potential for reform and stability, which is crucial for long-term growth. The test of the GNU’s success will depend on its ability to manage internal differences and implement effective policies. As the world watches, the coming months will reveal whether this newfound optimism is justified or if the challenges ahead will dampen the initial euphoria.
| For a more in-depth look at the GNU, we invite you to tune in to a post-election webinar with acclaimed political analyst, Professor Richard Calland, facilitated by Citadel Advisory Partner and Citadel Global Director, Bianca Botes. Click here to register. |
RECENT MARKET MOVEMENTS
US bonds rebound from three-month lows
The yield on the US 10-year Treasury note rebounded above 4.27% after dipping to a near-three-month low of 4.21% on 18 June. This occurred despite a series of softer economic data, including initial unemployment claims exceeding market expectations and remaining near 10-month highs in mid-June. Additionally, housing starts and building permits both declined unexpectedly in May, mirroring a contraction in retail sales.
The yield on the United Kingdom’s (UK’s) 10-year Gilt fell below 4.05%, marking its lowest point in over two months after the Bank of England (BoE) held its Bank Rate at 5.25%. The central bank hinted at future interest rate cuts, noting that the decision to maintain the rate was “finely balanced.” UK inflation slowed to 2% in May, hitting the BoE’s target for the first time in nearly three years. Yet, high inflation levels in the services sector are precluding immediate rate cuts. However, anticipation of a rate cut in August is growing as approximately half of the market has begun to price in this possibility.
South Africa’s 10-year government bond yield edged slightly above 10% on Thursday, up from a four-month low of 9.96% on 19 June. This rise came amid uncertainty surrounding President Cyril Ramaphosa’s cabinet composition under the new unity government. Following his inauguration, Ramaphosa engaged in negotiations with ANC alliance partners and other political entities, including the DA, concerning his administration’s structure. Investors also adjusted their expectations for interest rates, with the anticipated start of South Africa’s rate-cutting cycle postponed to November, influenced by the US Federal Reserve’s (Fed’s) hawkish stance and ongoing domestic inflation challenges.
Oil prices linger near seven-week highs
Brent crude futures fell to around $85/barrel as investors awaited the latest US crude inventories report. Industry data showed a 2.264-million-barrel increase in US crude stockpiles, contrary to forecasts for a draw. Despite this, oil prices remained near seven-week highs due to geopolitical concerns in the Middle East, including Israeli military actions in Gaza and threats of conflict with Lebanon’s Hezbollah. Robust global demand growth forecasts from the Organization of Petroleum Exporting Countries, the International Energy Agency, and the US Energy Information Administration for the latter half of the year also supported market sentiment.
Gold prices rose to around $2,340/ounce, hitting two-week highs, as sluggish US economic performance raised expectations for more than one rate cut by the Fed this year. While the Fed maintains a cautiously hawkish stance, Chicago Fed President, Austan Goolsbee, expressed optimism for further inflation reduction this year.
JSE hovers near record highs
Contracts on both the US’s S&P 500 and Nasdaq 100 futures pared some gains, while Dow Jones futures declined by about 40 points as trading resumed after Wednesday’s Juneteenth holiday. Economic data showed initial claims near ten-month highs, a decline in housing starts and building permits, and a fall in the Philadelphia Fed Manufacturing Index. Chip manufacturer, Nvidia, saw its shares gain about 3% pre-market, and global professional services firm, Accenture, surged nearly 8% after reporting a jump in new bookings. Technology company, Dell, also rose over 3% following news of its partnership with Nvidia to build an AI factory.
The UK’s FTSE 100 Index gained 0.5%, driven by expectations of future interest rate cuts by the BoE. Corporate updates saw grocery retailer, Sainsbury’s increase by 1% after selling its core banking operations to banking organisation, NatWest Group. CMC Markets, provider of online trading and investing, surged over 6%, and exploration and production company, Energean, rose nearly 2.5% following a significant asset sale.
In Germany, the DAX increased by 0.6%, with the Swiss National Bank lowering interest rates for the second consecutive meeting. Producer prices in Germany continued to fall at a slower pace, and top performers included biopharma group, Sartorius, and global healthcare company, Merck.
In Japan, the Nikkei 225 Index rose 0.16% while the Topix Index declined slightly. Investors remained cautious ahead of key economic data releases, and the outlook for the Bank of Japan’s monetary policy remained uncertain. Technology stocks mostly advanced, while financial, consumer, and auto stocks declined.
South Africa’s JSE Index hovered at record highs, with top advancers including miner, Northam Platinum and industrial processing, distribution and services company, Barloworld. Investors are awaiting President Ramaphosa’s cabinet appointments and US economic data for insights into the Fed’s interest rate path.
Rand remains on solid ground.
The US Dollar Index rose to 105.5 on Thursday, approaching six-week highs as traders digested US economic data. The greenback strengthened against the British pound and Swiss franc. The euro dropped below $1.072/€ amid various monetary policy decisions in Europe. The British pound fell below $1.27/£ after the BoE left the key rate steady, with increased odds for a rate cut in August or September.
The South African rand blew off some steam, ending a four-day run of gains, to edge above the R18.00/$ mark once more. Even with the weakening witnessed on Thursday, the rand remained near seven-month highs. Investors awaited President Ramaphosa’s cabinet appointments and adjusted expectations for the SARB’s interest rate-cutting cycle, now likely delayed to November amid persistent inflation challenges.
Key Indicators:
USD/ZAR: 18.00
EUR/ZAR: 19.29
GBP/ZAR: 22.79
GOLD: $2,362
BRENT CRUDE: $85.77
Sources: Bloomberg, Trading Economics and Refinitiv/Reuters.
Written by: Citadel Advisory Partner and Citadel Global Director, Bianca Botes.