South Africa's Weekly Market Outlook

The Bank of Canada and the European Central Bank (ECB) were the first G7 central banks to diverge from the US Federal reserve after they both cut interest rates by 25 basis points the previous week. The decision from the ECB came as no surprise to the market off the back of what the ECB described as a logical step due to retreating inflation across the 20-nation euro zone. The dollar index remained relatively muted off the back of the decision however the dollar surged against the major currencies following the stronger than expected US non-farm payroll print of 272 thousand in May, up from 165 thousand in April. 

The Fed will deliver their interest rate decision this week and market consensus is for the Fed to keep rates unchanged at 5.50%. The divergence between the Fed and the other major central banks is dollar positive and it further illustrates that the US economy is able to stomach the high interest rate environment while the other majoring economies have started to buckle. The Fed’s rate decision and FOMC statement will thus take center stage this week but the latest US CPI figures for the month of May will also be released along with the US 10-year and 30-year bond auctions. 

In terms of local data, the latest GDP results for the 1Q2024 printed a lackluster annualized q-o-q contraction of 0.1%, down from a growth rate of 0.3% in 4Q2024. On a y-o-y basis the SA economy only grew 0.5%. Weaker manufacturing, mining and construction drove the bulk of the downward momentum on the production side of the economy, contracting by an average of 2.27%, while agriculture grew roughly 13.5%. Over to the expenditure side of the economy, government consumption, household consumption, investment (gross fixed capital formation and changes in inventories), exports and imports all contracted in 1Q2024. The latest current account figures for the 1Q2024 were also released this week and positively, the deficit contracted to R84.6 billion, down from R162.9 billion. The decline in the current account deficit is largely attributable to the widening of the trade surplus in the first quarter. 

The first chart of the week is the DXY (dollar index). The DXY caught support off of the red support range on the 50% Fibo retracement level at 103.97. A stronger or in line with expectations US CPI this week coupled with the Fed maintaining the federal funds rate at 5.50% will allow the DXY to break above the 50 day MA rate of 105.09 and move higher towards the first resistance level of 105.96. Over the longer term a move towards 107.5 is still firmly on the cards.

The US 10-year note auction will be interesting this week depending on the size of the tails this time around. The 200-day MA of 4.35% has held support and another Fed pause will allow yields to rise and re-test levels above 4.50%.

The volatility of the rand is forcing us to “when in doubt zoom out.” Last week the rand managed to pull the pair to a low of 18.47 but the blue support range held its ground. The two critical rates to watch now is the 200-day MA support at 18.78 and the 61.8% Fibo resistance rate of 18.87. A break above 18.87 will allow the pair to test levels above the blue downward trend line and move into the red resistance range between 19.16 and 19.28. A break below 18.78 will however allow the rand to re-test the support range around the 18.50 mark. 

The rand is currently at the whims of global investor sentiment around SA’s new government of national unity but as the dust settles SA will be able to attract investors back into the SA bond market which is rand positive. The recent performance of the SA economy and the cooling of global commodity prices are however rand negative. Range bound movement between 19.00 and 18.70 can be expected as the pair looks likely to fall into a corrective pattern. A break below 18.50 will however invalidate the expected 5-wave impulse in the chart.

Over to the commodities. Doctor copper, lingo used in the commodities markets to explain price trends in copper’s ability to predict the overall health of an economy, has rallied in the first half of 2024. The run has been driven by global supply constraints, the looming threat of a worsening global deficit as well as momentum from speculative traders. Copper prices are now tethering on a knife’s edge after breaking below the 50-day MA of $9863.

Platinum has also nosedived while gold has remained relatively range bound and the 11% contraction off of the highs in May does not bode well for the rand. A confirmed break below the 50-day MA at $980 per ounce will allow for a deeper drop towards $930

Similarly, brent crude oil failed to hold levels above the 200-day MA of $83.60 per barrel. A failed break above the 61.8% Fibo level at $79.80 per barrel will see crude drop back to the December 2023 low of $72.50 per barrel.


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