Inflation, monetary policy, credit concerns and recession risk were significant drivers of global market activity last week, while local market participants received an update on the South African fiscal framework via Wednesday’s Medium-Term Budget Policy Speech.
International markets focused on rates decisions from the Bank of Japan and the European Central Bank, and monitored US housing data, as the US mortgage market wrestles with rising interest rates.
The South African yield curve rallied by 28bps on average across the curve. Front-end yields moved faster than back-end yields, resulting in a re-steepening of the curve by ~14.5 bps looking at the R2048/R186 spreads.
International Market Developments
Inflation
The ECB’s Governance Council instituted their second conservative rate hike of 75bps, bringing the cumulative tightening to 200bps. Although the decision among the GC was not unanimous (three members preferred a 50-bps hike) it was a measure put in place to contain inflation, September’s headline and core inflation having reached new highs at 9.9% and 4.8% respectively. The tone from President Lagarde read hawkish as she said while there has been ‘significant progress, there was more ground to cover in removing policy accommodation,’ likely signaling further hikes in the future.
Recession Risk
Credit concerns continue to grow in the Chinese property market. Meanwhile, South Korea will be implementing a liquidity program for the credit market following a rare default in the commercial paper offered by a developer. Furthermore, local officials warned that the financial position of some Vietnamese property businesses was unhealthy. Rising global interest rates raise the overall level of repayment concerns in the Asia Pacific region.
Geopolitics
Chinese President Xi Jinping secured his third term as leader of the Communist Party. Chinese tech stocks responded negatively to the news, falling 10% on the 24th of October, as investors feared that the growing centralisation of power would prompt further tech crackdowns.
UK bonds surged after Boris Johnson pulled out of the race to succeed Liz Truss, leaving Rishi Sunak to become Prime Minister unopposed. Investors expect Sunak to restore credibility to UK economic policy making and help calm the nation’s rattled markets. Short-dated notes led the rally, sending the yield on the two-year note lower by as much as 36 basis points to 3.44%.
Local Market Developments
The positive medium term budget speech had little impact on markets leading to a shallow and short rally on Thursday. The national treasury announced a consolidating debt to GDP of 4.9%, which was better than February’s forecast of 6% of GDP. Treasury also sees a primary surplus for the first time in 15 years for the financial year of 2022/2023. Treasury aims to limit public sector wage bill growth to 3.3% over the next three years. Furthermore, the state has announced its plan to take over 1/3 to 2/3 of Eskom’s debt, with detailed plans to be announced in February.
Local markets had a negative reaction to the budget as the treasury also announced a reduction in issuance and a discontinuation in its floating rate note auction, which had previously been well received by the market.