GIVING CREDIT WHERE IT IS NOT DUE
On Wednesday, a headline from Russia’s TASS newswire, reading, VEB.RF signs agreement with China, South Africa on credit lines in national currencies, resulted in a day of market drama. South African bonds and the rand found themselves in a whirlpool of uncertainty as investors responded to the news.
This week’s key themes:
- A misunderstanding sends South African bonds and the rand into a tailspin
- US, UK, and South African bond yields on the up and up
- US and European stock markets gain on the back of strong earnings
- Oil and gold prices fluctuate amid geopolitical tensions in the Middle East and changing market expectations for US monetary policy
- The dollar remains top of the league
Chalking it up to a misunderstanding
The TASS headline hinted at deepening financial entanglements between Russia’s State Development Bank (VEB) and South Africa’s Development Bank of Southern Africa (DBSA). Given the current geopolitical climate, where Russia remains isolated due to sanctions, the news caused concern. Investors feared South Africa was strengthening ties with a nation under intense global scrutiny, triggering a South African bond sell-off and sending the rand into a tailspin.
However, the frenzy was a classic case of “headline overreaction.” As it turns out, the story was less sensational than it first appeared. VEB and DBSA quickly clarified that there was no direct credit line between the two banks. The agreement, they emphasised, was a broader framework established under the BRICS (Brazil, Russia, India, China, South Africa) Interbank Cooperation Mechanism (ICM). This cooperative framework, signed at a recent BRICS summit, merely laid out potential future avenues for financial collaboration, not a commitment to a concrete credit line.
With the air cleared, the markets began to settle. Bond yields normalised by the day’s close, and the rand clawed back some of its losses. Analysts soon dubbed the episode a “storm in a teacup,” pointing out how swiftly markets can react to misunderstood information.
The BRICS drive for financial autonomy
The story behind the story is however more intricate than the fleeting market panic. It centres around the broader ambitions of the BRICS nations to focus their efforts towards breaking away from the financial dominance of Western institutions like the International Monetary Fund (IMF) and World Bank, and currencies such as the United States (US) dollar. A significant pillar of this strategy is the Master Agreement on Extending Credit Facilities in Local Currency. This move aims to enable BRICS countries to trade and lend in their own currencies, bypassing the traditional reliance on the US dollar or euro. The goal is simple but profound: reduce exposure to the volatility of global exchange rates and reduce costs associated with dollar-based transactions.
The ICM also seeks to unlock capital for long-term development projects through blended financing—mixing public funds with private investments. The focus is on infrastructure, transport, and sustainable energy, all under the umbrella of economic self-reliance. It’s a bold push to redirect the financial tide toward emerging market priorities independent of Western agendas.
Building resilience: trade finance and payment systems
BRICS isn’t stopping at foreign exchange transactions and development loans. The bloc’s financial institutions such as DBSA, VEB, China Development Bank, Eximbank of India, and Brazil’s BNDES are developing tools to facilitate intra-BRICS trade, such as letters of credit and local currency trade finance. This will give businesses within BRICS nations a lifeline, sheltering them from the unpredictable currents of global currency markets, should it be broadly adopted across the banking sector. Moreover, the idea of a BRICS-exclusive payment system is gaining traction. This initiative is particularly appealing for nations like Russia, which has faced significant restrictions on using Western payment platforms due to sanctions. A BRICS-based system would allow smoother transactions across member states, insulating them from geopolitical risks tied to Western-dominated networks like SWIFT.
Eyes on sustainability: carbon markets and green finance
Climate change is another rather contentious domain in which BRICS nations are asserting their independence. Among the ideas floating around is a unified BRICS carbon market, enabling member countries to trade carbon credits on their own terms. This wouldn’t just help them hit their climate targets and create a distinct carbon trading ecosystem separate from Western models, it would also mean that by building their own platforms for carbon pricing and trading, BRICS nations could finance green projects without relying on Western funds, all while contributing to global sustainability efforts.
The big picture
The rapid reaction to a misleading headline about South Africa’s financial ties with Russia underscores global markets’ sensitivity to BRICS’ every move. There are many recent examples of how South Africa’s relationship with BRICS nations, Russia in particular, has resulted in market volatility. One recent example is the turmoil the local currency faced when South Africa was believed to trade arms with Russia in May of last year. However, the swift market correction highlighted a more profound reality: the BRICS nations are not rushing into reckless bilateral deals. They are meticulously laying the groundwork for a long-term, cooperative financial architecture to reduce Western dominance.
From local currency trade to green finance, BRICS is crafting a financial landscape where emerging markets play by their own rules. The stakes are high, and while these initiatives are still taking shape, they signal a future where the financial power balance could shift—changing how global trade, infrastructure, and sustainable development are funded in years to come.
Market matters
US bond yields at over three-month highs
The bond markets experienced a turbulent week, driven by a series of economic indicators and geopolitical concerns. In the US, the yield on the 10-year Treasury note hovered above the 4.23% mark. This level is near its three-month high and has been influenced by robust US economic data including a drop in unemployment claims and an increase in the S&P Purchasing Managers’ Index (PMI), both of which showcase the strength of the US economy, and signal that the US Federal Reserve (Fed) may not cut rates as aggressively as some have anticipated. Adding to this sentiment, speculation over a potential Trump presidency is stoking inflationary fears, suggesting that tighter monetary policies may be necessary to counteract rising prices.
Across the Atlantic, the United Kingdom’s (UK’s) 10-year Gilt yield climbed to 4.24%, approaching a 16-week high. Reports indicated that UK Chancellor of the Exchequer, Rachel Reeves, might increase borrowing in her upcoming budget, leading to concerns over the UK’s fiscal stability. This move could potentially slow the Bank of England’s (BoE’s) anticipated rate cut cycle, further impacting long-term bond yields. In addition, BoE Governor, Andrew Bailey, voiced concerns about persistent inflation, particularly in the services sector, which remains elevated. Futures markets adjusted expectations, showing a reduced probability of a BoE rate cut in November.
The 10-year government bond yield in South Africa was near 9.60%, its highest level since mid-July. The yield mirrored movements in US Treasuries amid fears of smaller Fed rate cuts.
All eyes on earnings
On Thursday, US equities saw a mixed performance, with the S&P 500 and Nasdaq posting modest gains of 0.2% and 0.4%, respectively, while the Dow Jones lagged, shedding about 90 points. Corporate earnings were in focus, with standout performances from electric vehicle manufacturer, Tesla, whose shares jumped nearly 14% after impressive earnings and delivery numbers. Package delivery company, UPS, also surged over 9% as it returned to growth in sales and profits after a prolonged downturn. However, not all news was positive; tech firm, IBM and railroad holding company, Union Pacific, faced sharp declines after missing revenue forecasts, and aircraft manufacturer, Boeing, slipped as labour disputes extended a strike.
The UK’s FTSE 100 rose over 0.5%, bolstered by strong corporate earnings. Banking group, Barclays, exceeded profit expectations, propelling its stock price to a nine-year high. Fast moving consumer goods company, Unilever, and resources company, Anglo-American, also contributed to the FTSE’s positive momentum. Meanwhile, Germany’s DAX gained 0.6%, supported by auto sector gains and positive PMI data, which suggested a slight improvement in the private sector despite an overall contraction.
The Johannesburg Stock Exchange followed suit, closing higher for the week. Resource-linked sectors, particularly precious metals, and financials led the gains. Anglo-American was a standout performer, rising nearly 7% after maintaining its production outlook despite copper and diamond output challenges.
Geopolitics keep commodities on edge
Commodities are experiencing significant fluctuations amid geopolitical tensions and market data. Brent crude oil prices inched toward $76/barrel, recovering from a recent dip. Uncertainty around the Middle East conflict is keeping investors on edge, especially as diplomatic efforts are failing to quell hostilities. A larger-than-expected build in US crude stockpiles pressured prices, but geopolitical risks still dominate sentiment.
After a recent pullback, gold prices saw a technical rebound, rising above $2,730/ounce. The metal’s status as a safe-haven asset remains intact, with ongoing tensions in the Middle East and uncertainty over the US election adding to its appeal. However, rising US Treasury yields and a strong dollar are keeping gold’s gains in check as the expectation of a more cautious monetary trajectory by the Fed is weighing on the market.
Dollar dominance
The US Dollar Index experienced a volatile week, peaking at a three-month high before easing to 104.2. Strong economic indicators and speculation around the Fed’s future rate-cutting trajectory supported the dollar. US jobless claims fell unexpectedly, and a cautious tone from Fed officials have resulted in investors anticipating a slower pace of rate cuts. This sentiment dampened demand for riskier assets, strengthening the greenback.
The euro recovered slightly, rising to $1.08/€ after hitting a four-month low. German PMI data hinted at modest improvements in the country’s private sector, leading to speculation that the European Central Bank might only reduce rates by 25 basis points in December. However, persistent inflation in the services sector and wage pressures remain concerns for the eurozone.
In the UK, the pound rebounded toward $1.30/£, bolstered by news that the Chancellor of the Exchequer might increase borrowing capacity, impacting the timeline for the BoE’s rate cuts. The UK Treasury’s cautious approach, alongside slower-than-expected UK PMI growth, tempered some of the market’s enthusiasm.
The South African rand remained under pressure, trading near R17.70/$, close to its weakest levels since mid-September. A stronger dollar and concerns over China’s economic stimulus and domestic political uncertainties are weighing on the local currency.
Key indicators:
USD/ZAR: 17.68
EUR/ZAR: 19.13
GBP/ZAR: 22.93
GOLD: $2,729.70
BRENT CRUDE: $74.70
Sources: Refinitiv, Trading Economics, Investing.com, National Treasury, Business Insider, Institute for Global Dialogue, News24 and South African Government News Agency.
Written by Citadel Advisory Partner and Citadel Global Director, Bianca Botes.