Global financial markets have experienced an exceptionally volatile week, with emerging markets, including South Africa, firmly caught in the crosscurrents. Investors have rapidly withdrawn capital from higher-risk debt instruments, setting new benchmarks for outflows. According to JPMorgan and LSEG Lipper, high-yield bond funds recorded $9.6 billion in redemptions, while leveraged loan funds saw a $6.5 billion exit—marking the largest weekly withdrawals on record. Data from the JSE corroborates this significant divestment, which likely contributed to the pronounced depreciation of the ZAR. However, we maintain that the currency’s decline was also materially influenced by uncertainties surrounding the potential dissolution of the GNU, which remains far from stable despite recent signs of reconciliation.
On the topic, the DA appears to have gained some strategic leverage. The parliamentary budget office endorsed the DA’s position in the ongoing fiscal policy debate, particularly its opposition to a proposed VAT increase. This development undercuts the ANC, which had recently celebrated the adoption of its fiscal framework. With critical budget legislation—namely the Division of Revenue and Appropriation bills—still pending, the ANC faces mounting obstacles to enacting its budget, particularly with a VAT hike included. A return to negotiations appears inevitable, which may, paradoxically, strengthen the GNU’s cohesion and foster a more constructive national outlook. Such unity is imperative, given South Africa’s entrenched economic challenges. The latest manufacturing production figures underscored this reality, revealing a steeper-than-anticipated decline of -3.2% year-on-year for February, highlighting persistent structural vulnerabilities that will only be remedied by deep-routed, growth-enhancing reforms.
ZAR Markets
Despite a gradual retreat yesterday from the previous night’s recovery, the ZAR still appears to have some recovery momentum this morning. It has pivoted around the R19.5000 mark in recent sessions, but is once again trading below that level and could sustain these gains into the weekend. Conditions for a continued, albeit cautious, ZAR recovery thus appear favourable. Despite global equity markets facing sustained downward pressure and hints of further softening, the USD is losing ground. Additionally, there are indications that the GNU may remain intact, with mounting pressure on the ANC to abandon its proposed VAT increase. Should weekend talks between the ANC and the DA progress constructively, with the ANC stepping back from the VAT proposal, the GNU is likely to endure. Such an outcome would also signal progress in navigating the complexities of coalition governance. A collapse of the GNU serves no party’s interests and would undermine South Africa’s need for decisive leadership. A successful resolution to the budget impasse could pave the way for a meaningful ZAR rally as markets open next week.
Global FX Markets
The U.S. dollar dropped sharply on Friday as investors lost confidence in the American economy, prompting a broad shift into traditional safe-haven assets such as the Swiss franc, Japanese yen, euro, and gold. This movement came in the wake of rising trade tensions and erratic policy signals from President Donald Trump, whose sudden 90-day suspension of higher tariffs on most countries excluded China and failed to reassure markets. Wall Street’s short-lived relief rally from Wednesday reversed dramatically as investors questioned the stability and predictability of U.S. policy. U.S. Treasuries also sold off, with 10-year yields poised for their biggest weekly surge since 2001. Meanwhile, gold hit a record high, and the Swiss franc reached its strongest level in a decade. The dollar index fell below 100 for the first time since July 2023, underscoring the currency’s broad retreat. Trump’s unexpected tariff pause was a reaction to rising systemic risk and market turmoil, which caused capital to flee U.S. assets. Despite official claims that the tariff rollback was planned, Trump later admitted the market reaction played a role in his decision.