TRUMP BEING TRUMP, WHILE UK BONDS LEAD GLOBAL MARKET SELL-OFF

This is an extract from the Weekly Review of 10 January 2025. The full Weekly can be found here (for free, but sign up if you want to receive notifications of new editions and other BER publications)

The Week in Perspective written by Lisette IJssel de Schepper

US President-elect Donald Trump did what he does best this week and moved financial markets through social media and a wide-ranging press release later in the week. Following announcements by his team that could be interpreted as ‘going soft’ on his tariff plans (and the dollar weakening as a result), he went all in on a social media post, which caused markets to turn and once again worry about the potential impact of tariffs. His plans to ‘buy’ Greenland also featured, with Trump refusing to rule out a military invasion to seize the region if needed for national security purposes. He did say he would not use military but rather “economic force” to pressure Canada into what he wants. At the same time, he doubled down on his argument that the US must reclaim the Panama Canal. All this, and he is not even president yet. One thing is certain: it will be a volatile couple of years, and volatility is generally not good for small, open/emerging economies like SA.

The domestic data releases were disappointing. While new vehicle sales continued their three-month streak of positive annual sales growth, monthly sales declined in December. Manufacturing production contracted monthly and annually in November. This was foreshadowed by a dip in the November Absa PMI. Worryingly, the Absa PMI—released this week—fell further in December. The S&P Global PMI also pointed to a loss of momentum at the end of the year.

In a blow to the local manufacturing sector (with knock-on implications for the rest of the economy), ArcelorMittal SA (AMSA) announced it would proceed with the winding down of all of its longs steel business by the end of Q1. While receiving some support after warning about the challenges faced by the production processes in November 2023, AMSA said this was not sufficient to overcome the underlying structural constraints. These include the worsening steel market, unaffordable energy and logistics costs in SA, and rising low-cost steel imports from China. Coke-making operations at Newcastle will be scaled back to reflect the lower demand following the closure of the local plants. AMSA estimates that 3?500 direct and indirect jobs will be affected.

The lack of momentum in manufacturing production and the reasons for AMSA’s decision to close its longs business underscore that SA remains a challenging place to do business. While there is goodwill and confidence in a better future (reflected in the positive expected business conditions reading of the latest PMIs despite current weakness), we need to make real progress on the structural reform front to ensure that the cyclical push expected over the short term translates into sustained economic growth required over the medium term. Unfortunately, the latest financial statements from Eskom and Transnet were uninspiring (see the Reform Tracker below for more).

A sell-off in government bonds saw yields rise across the globe in what has been dubbed a return of bond market activism. Markets are worried about sticky inflation, the impact of Trump’s policies and rising government debt. Of course, higher yields complicate a government’s ability to bring debt down even more. Amid concerns that the economy is facing stagnation, the UK is feeling the brunt of the sell-off, with 10-year yields rising to the highest level since the global financial crisis (4.93%). The 30-year yield rose to the highest level since the late 1990s. In addition, other ‘safe’ bonds, such as those issued by Germany and Japan, are also seeing higher yields. In the US, traders are ‘concerned’ that faster economic growth means less/no rate cuts while Trump’s plans to borrow freely and cut taxes hurting the fiscus. The minutes from the December US Federal Reserve meeting, released this week, indicated that most members find it an appropriate time to slow the pace of easing amid upside risks to inflation. The expectation of fewer rate cuts has resulted in US treasury yields rising above 4.7% for the first time in nine months. Fund managers are warning that the repricing may go further (i.e. yields may go higher). Local bonds also sold off, with the 10-year yield rising by 13bps from last Thursday.

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Editor: Lisette IJssel de Schepper Email: [email protected]

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