Introduction:

Global markets are currently facing uncertainty stemming from recent weakening US economic data, which is fueling speculation about potential Federal Reserve rate cuts, and persistent trade tensions. A key focus for investors is the upcoming US nonfarm payrolls report, expected to provide insights into the labor market and heavily influence currency movements. In contrast, South African assets are rallying significantly, buoyed by increased domestic political stability following the formation of a government of national unity and seemingly improving trade relationship prospects with the United States.

Key takeaways from sources:

Global markets are experiencing a mix of caution and volatility due to several interconnected factors. A major focus is the weakening US economic data, which has contributed to a “bearish U.S. dollar narrative”. This softer data is seen as piling pressure on the Federal Reserve to ease policy, with futures implying a high probability of a rate cut in September and another in December. The upcoming US nonfarm payrolls report is critically important and under “greater scrutiny”, as analysts believe it will heavily influence currency movements and provide insight into whether a “weakening labour market” is materializing. Expectations for the report are centered around an increase of 130,000 jobs and a steady unemployment rate at 4.2%, though there are risks of a downside surprise. Such an unexpected weakness could bring the next US rate cut forward. The dollar is consequently headed for a weekly loss, trading just above a six-week low.
Adding to global market uncertainty are persistent trade tensions. Investor worries about US trade negotiations and the lack of progress towards an early July deadline continue. A recent call between President Trump and Chinese President Xi Jinping offered “little clarity to ease ongoing trade tensions”. While the fact that they are talking is positive, there is a view that neither side wants to concede much, indicating a “lack of goodwill to fundamentally improve the trade relationship”. This uncertainty around tariffs is considered damaging to confidence and likely to weigh on trade and growth prospects, contributing to a deterioration in global manufacturing operating conditions and the steepest decrease in new export orders since August 2023.
In contrast to the global uncertainty, South African assets are rallying significantly. The Johannesburg stock index is nearing a record high, benchmark bond yields are near a three-year low, and the rand is at its strongest level in six months, having gained 3% against the dollar over the past 30 days. This positive performance is attributed, in part, to increased domestic political stability. The successful formation of a government of national unity (GNU) and consensus on the budget is providing certainty to bond treasury issuances and offering more realistic guidance on fiscal deficits and GDP outlooks. While the debt-to-GDP ratio remains a negative picture, the Treasury’s stricter fiscal spending and pragmatism are viewed positively by the market. Additionally, a “decent rally” in key South African commodities like platinum and rhodium is expected to support PGM miners and tax revenues.
Furthermore, a seemingly improving trajectory in US-South Africa trade relations is contributing to the positive sentiment towards South African assets. President Ramaphosa’s recent comprehensive meeting with President Trump has “opened the door for more engagements between our respective trade teams”. South Africa has presented a trade proposal to the US and is planning “more formal and substantive engagement on what I will call the new trade relationship framework with the US” later in the month. These discussions will include trade tariffs and expanding the “basket of tradable goods”. Ramaphosa is also seeking South Africa’s continued participation in the Agoa preferential trade scheme. He is optimistic about achieving a “mutually beneficial trade relationship”. Ramaphosa is also “far more hopeful now than we were before the visit to the White House” that President Trump will attend the G20 summit in Johannesburg, where South Africa holds the presidency and will hand it over to the US. The narrative regarding alleged persecution of white Afrikaners in South Africa is seen by Ramaphosa’s spokesperson as “dying a very slow natural death” because it “cannot be substantiated”, with the government viewing programs facilitating emigration as recruitment rather than a refugee situation.
Despite the asset rally, the South African trade account is expected to weaken due to a projected slowdown in exports. This forecast is based on deteriorating manufacturing operating conditions, as indicated by the Absa Manufacturing PMI returning to contractionary levels and the JP Morgan Global Manufacturing PMI showing the steepest decrease in new export orders since August 2023. In Q1 2025, South Africa imported more than it exported, and the trade surplus narrowed slightly. However, South Africa’s terms of trade, including gold, improved in Q1 2025 as the rand price of exports increased more than imports. The current account deficit as a ratio of GDP remained broadly the same at 0.5% from Q4 2024 to Q1 2025.
Other market developments include the euro rising to a 1-1/2-month top after “hawkish remarks” from the European Central Bank, although investors have given up on a July rate cut. Sterling scaled a more than three-year peak. Tesla shares experienced significant volatility due to a public fallout between Trump and Elon Musk, although signs suggest tempers may be cooling. Oil prices are headed for weekly gains on supply concerns, and gold prices climbed for the week. President Ramaphosa is also scheduled to attend the G7 summit and a Financing for Development conference, but will not attend the St Petersburg International Economic Forum.

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Sources referenced:

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