The South African financial markets have been turbulent this week following the national elections and the path ahead remains uncertain off the back of the ANC sliding below 50% for the first time in our country’s young democracy. The dust is still far from as settled as markets and citizens await for the new coalition government to take shape which will put the SA capital markets and the rand under pressure over the near-term. The turbulence caused the rand to slip almost 4% against the dollar since Election Day while SA 10-year bond yields spiked above 10.50% despite the SARB’s hawkish comments after the MPC’s decision to keep rates unchanged at 8.25%.
Additionally the latest US GDP and Personal Consumption Expenditure, the Federal Reserve’s preferred measure of inflation, results also added gust to the winds for the local markets. The US 1Q2024 GDP results printed a much weaker quarter-on-quarter result of 1.3%, down from 3.4% in the 4Q2023 while the PCE remained unchanged at 2.7%.
The economic calendar for the week ahead is packed with a host of Purchasing Manufacturing Indices (PMI’s) both local and international while the headlining events is the US non-farm payrolls print and the European Central Bank’s interest rate decision.
The ECB, along with the Bank of England, has been very outspoken recently that they plan to diverge from the Fed’s monetary policy path and that their economies are almost at a point in which they can start cutting rates. This week provides the opportune time for the ECB to put their euros where their mouth is but we can expect another strong dollar rally if they actually do.
The first chart of the week is the rand which managed a strong recovery to a low of 18.02 in the lead up to the national elections. This move was largely due to the strong precious metal prices, particularly platinum, and the dollar which remained relatively range bound. The critical resistance levels to watch are the 200-day MA at 18.77 and the 61.8% Fiboretracement rate of 18.87. A failed break above these levels will allow the rand to recover some of its election losses towards the support rate at 18.55.
Continued political uncertainty regarding the new coalition government will however see the pair break above 18.87 and hurtle towards the yearly high of 19.40. Over the slightly longer-term, a favorable political outcome following the coalition negotiations will attract foreign capital back into the local market which will allow the rand to pull the pair below 18.00 at the back of the year. This is however a best case scenario.
Over the SA top 40 index, local equity markets took a hammering following the elections. The index looks set to fall further towards the 50-day and 200-day MA support levels at R69,735 and R68,080. The index is coming from heavily over bought zones but once the dust from the elections settle a good buying opportunity may present itself below the 200-day MA levels, if the coalition outcomes are deemed favourable to international investors.
The broad based dollar index has held up well and the 200-day MA support level at 104.43 is keeping the dollar from further depreciation. The DXY is looking set to make another leg higher if the ECB serve markets with a rate cut this week.
Similarly to the DXY, the US 10-year yield is showing signs of also setting up for another leg higher which will allow yields to climb back towards the 5.00% handle. The mainstream narrative however is that yields has peaked but another fresh US bond sell-off sparked by global geopolitical tension could easily allow yields to spike higher.
