This week, South Africa’s high-profile diplomatic mission to the United States (US) delivered more drama than results. The delegation, led by South African President, Cyril Ramaphosa and key ministers, set out to repair relations and explore new trade opportunities, but instead found themselves in the midst of a tense political confrontation and tough negotiations.
Despite the country facing two major event risks on Wednesday: a crucial budget announcement and the headline-grabbing spectacle, the rand barely blinked.
Diplomatic drama in Washington
The Ramaphosa-Trump meeting quickly turned into a political showdown. The US president, joined by prominent business figures, confronted the South African team with controversial claims about the country’s internal situation. The South African delegation stood firm, rejecting these allegations and highlighting the complexity of the nation’s challenges. The exchange was tense, but both sides ultimately agreed to keep communication channels open and continue discussions on trade and investment.
Trade talks hit a wall
Trade was meant to be the central theme, but besides the agreement to keep communication lines open, progress was limited. South Africa’s proposals for new trade agreements and increased energy imports were met with scepticism. The US side insisted on maintaining strict conditions, including exemptions from certain local economic policies, which South Africa was unwilling to grant. South Africa’s efforts to preserve preferential access for agricultural exports also stalled, leaving future trade relations uncertain.
Starlink: a new offer on the table
In a bid to attract investment and improve digital connectivity, South Africa made a special offer to South African-born tech entrepreneur, Elon Musk. The proposal would allow his satellite internet service to operate in the country without the usual ownership requirements, instead focusing on local investment and rural access. This move was designed to break a long-standing deadlock and signal South Africa’s openness to innovative solutions, even as broader negotiations remained stuck.
Budget 3.0 and the rand’s steady hand
On the same day as the diplomatic fireworks, South Africa’s finance minister unveiled a revised budget. The plan avoided VAT and income tax hikes, opting instead for targeted spending cuts and increased fuel levies (also a tax…). Despite the significance of both the budget and the US meeting, the rand remained remarkably stable. Investors appeared reassured by the government’s commitment to fiscal discipline and largely ignored the diplomatic drama taking place in Washington DC. The buckling greenback, of course, also provided the rand with a supportive hand.
Market reaction: business as usual
The rand’s resilience was notable. While political headlines dominated the news, financial markets took the developments in stride. The currency held steady, the stock market posted gains, and bond yields remained unchanged. For investors, the week’s events were seen more as noise, than as substance, and, as such, will have little immediate impact on the country’s economic outlook.
South Africa’s US mission was a reminder of the unpredictability of global politics. The delegation faced unexpected challenges but maintained composure, pushing for practical engagement on trade and investment. The new approach to digital infrastructure showed flexibility, even as broader trade talks faltered.
TURNING TO THE MARKETS
The week’s key themes:
· US bond yields reflect US debt concerns
· Wall Street cautious amid ongoing fiscal policy worries
· Supply glut weighs on oil price
· US debt woes weigh on dollar
Bonds
The yield on the US 10-year Treasury note climbed to around 4.6%, reaching its highest level in three months after the US House of Representatives narrowly passed President Trump’s new tax bill. This legislation, which now heads to the Senate, is expected to increase the US budget deficit by nearly $3 trillion over the next decade and raise the debt ceiling by $4 trillion. These developments have heightened concerns about the US government’s ability to manage its finances, especially after Moody’s downgraded the country’s credit rating, citing persistent deficits and rising debt.
The immediate effect has been a sharp rise in US government borrowing costs, as investors demand higher yields to compensate for increased fiscal risk. This has triggered a broader selloff in global bond markets, pushing up yields in other major economies.
In the United Kingdom (UK), the 10-year Gilt yield rose to its highest level in six weeks, as government borrowing exceeded expectations and inflation remained stubbornly high. Despite some improvement in business confidence, the UK’s manufacturing sector continues to contract, and public sector borrowing is surging. In Germany, bond yields also edged higher, reflecting investors’ unease over global fiscal trends and mixed signals from economic data.
The South African 10-year bond yield also climbed, to above 10.7%, following a tense meeting between President Ramaphosa and President Trump, and after the finance minister cut the country’s growth forecast.
Equities
US stock futures remained mostly steady this morning as investors weighed the impact of President Trump’s newly passed tax-and-spending bill on the nation’s fiscal outlook. The legislation, which includes significant tax cuts and higher defence spending, is projected by the Congressional Budget Office to add nearly $4 trillion to the national debt over the next decade. This prospect has heightened concerns about long-term fiscal stability, especially after Moody’s downgraded the US credit rating, citing rising deficits and the increased cost of servicing government debt.
The immediate market reaction has been cautious with the Dow Jones closing flat, while the S&P 500 slipped slightly, and the Nasdaq posted a modest gain on Thursday. Seven of the eleven S&P 500 sectors finished lower, with utilities, health, and energy stocks leading the declines, while technology and consumer-related sectors outperformed.
Outside the US, the FTSE 100 in London fell 0.5% amid disappointing corporate earnings and a larger-than-expected UK government deficit. In Germany, the DAX dropped 0.5% as investors digested mixed economic data and the global implications of US fiscal policy. In contrast, South Africa’s main stock index has surged over 10% since the start of the year, bucking the global trend.
Commodities
Brent crude oil prices dropped toward $64/barrel, heading for their first weekly decline in three weeks. This fall is mainly due to expectations that the expanded Organisation of the Petroleum Exporting Countries, OPEC+, which is a coalition of major oil-producing nations, might approve another increase in oil production at their upcoming meeting. The group is considering raising output by roughly 411,000 barrels per day in July, which would be the third consecutive monthly hike. While no final decision has been made, even the possibility of more supply has unsettled the market. These production increases come at a time when US crude oil inventories unexpectedly rose, signalling that supply may already be outpacing demand. As a result, demand for US oil storage has surged to levels not seen since the COVID-19 pandemic, with traders preparing for a potential supply glut. The market is also closely watching the Baker Hughes rig count – a key indicator of future US oil and gas production – to gauge whether American output will add further to the oversupply.
Geopolitical risks are also influencing energy markets. Reports suggest Israel is preparing for possible strikes on Iranian nuclear facilities if US-Iran nuclear talks fail, raising fears of regional supply disruptions. However, these concerns have, so far, been outweighed by the prospect of increased oil supply and rising stockpiles.
Meanwhile, gold prices hovered near $3,300 per ounce, recovering from earlier losses and are set for a weekly gain. Investors are turning to gold, yet again, as a safe haven asset amid worries about US fiscal policy, especially after a major tax-and-spending bill was passed and Moody’s downgraded the US credit rating. Gold is an attractive asset for investors because it is a good diversifier of portfolios as it protects against inflation and its value is resilient during volatile and uncertain economic times. A weaker US dollar has further supported gold, making it more attractive to buyers worldwide. Ongoing geopolitical tensions have added to gold’s appeal as a refuge in uncertain times.
Currencies
The US Dollar Index dropped to around 99.6, marking a weekly loss of over 1%, as global investors reacted to growing worries about the US fiscal outlook. The main driver behind this decline was President Trump’s new budget bill. These anxieties were further heightened after Moody’s downgraded the US credit rating from Aaa to Aa1, citing the country’s ballooning deficits and the rising cost of servicing its $36 trillion debt. Such a downgrade signals to investors that lending to the US is riskier, which can increase borrowing costs for the government and the broader economy. The dollar also faced pressure from a lack of progress in US trade negotiations, prompting some investors to shift funds away from US assets. However, there has been a slight easing of tension as US and Chinese officials agreed to keep diplomatic channels open.
In Europe, the euro strengthened to about $1.13/€, buoyed by better-than-expected German business sentiment, even as eurozone private sector activity contracted at its fastest pace in six months. The British pound rose above $1.336/£, supported by a landmark UK-European Union agreement on post-Brexit relations and higher-than-expected UK inflation, which could affect future Bank of England policy decisions.
Meanwhile, the South African rand held firm near a five-month high against the dollar, benefitting from a depressed greenback as markets reacted positively to the prospect of new trade talks with the US and ongoing speculation about changes to South Africa’s inflation-targeting regime, despite a weaker economic growth outlook and slightly higher inflation. The rand has also strengthened against the euro and the pound.
