Our weekly podcast by Kevin Lings:

Escalating Middle East war raises unknowns for markets

In this podcast, STANLIB’s Chief Economist, Kevin Lings, discusses two topics: the potential effects of the escalating war in Iran; and broadening private sector credit demand in SA. The war has triggered a rise in safe-haven assets, including gold, and in the oil price. For SA, the effect may be to push inflation higher, deferring interest rate cuts.

The focus areas during the week included:

• The major US equity market declined during the week amid ongoing concerns about the disruptive potential of artificial intelligence (AI), heightened global trade and tariff uncertainty and the escalation of tensions in the Middle East (see discussion below). The Dow Jones Industrial Average led declines, losing 1.3% of its value, while the S&P 500 fell 0.4% and the NASDAQ 100 declined by 0.2%. Interestingly the Russell 1000 value index gained a further (but modest) 0.1% in the week and is up 7.3% year-to-date.
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• The decision on Saturday by the US and Israel to attack Iran is likely to unsettle financial markets at the start of the week and is expected to push the price of oil (which rose 2% in the week) and gold (up 3.3%) higher, encourage a move into “safe-haven” assets and result in increased volatility in most equity markets. At this stage it is unclear how long the fighting will continue or what lasting impact it will have on the Middle East. However, all three major participants (US, Israel, Iran) appear more than willing to use significant military force.
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• The STOXX Europe 600 Index touched another new high at the end of the week, with a gain of 0.5%. This pushed the year-to-date performance up to an impressive 7%. Robust corporate earnings and investors’ desire to diversify away from the technology-heavy US equity market appeared to offset concerns about the impact of AI and heightened geopolitical tensions – although the recent events in Iran will likely test the market’s resilience. SA’s All-Share Index also had another good week, gaining a very impressive 4.4% to reach another record high, mainly because of an 11.4% increase in the Resource 10 index. Year-to-date the local equity market is up 10.9%, with foreign investors buying a net $800 million of shares in January 2026, the largest monthly purchase since March 2022.‍
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• Japan’s stock markets rose, with the Nikkei 225 Index gaining 3.6% and the broader TOPIX Index up 3.4%. Both indexes reached record highs, as investors remained optimistic about the policy outlook under Prime Minister Sanae Takaichi. Markets appeared to be largely unconcerned about the latest tariff announcements by the US. Bank of Japan (BoJ) Governor Kazuo Ueda noted that the 15% global tariff matches existing levies on Japan and is unlikely to have a major impact.
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• The risk-off tone in the US appeared to help support the US bond market, which generated positive returns as yields generally finished lower than the prior Friday. For example, the yield on the US government’s 10-year bond ended the week below 4% (at 3.97%) for the first time since late October 2025, down from 4.08% at the end of the prior week.‍
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• In February, the rand appreciated by 0.7% against the US dollar, outperforming the Emerging Market Currency Index, which gained 0.4%. Year-to-date the rand is up 4.1% against the dollar, helped by increased foreign capital inflows in January (net bond and equity flows amounted to a very welcome $2.84 billion in January 2026), a National Budget that reflected further fiscal consolidation, additional evidence of policy reform, and a higher gold price.‍
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• USPPI inflation unexpectedly accelerated in January, rising by 0.5% m/m. This was above market expectations for an increase of 0.3%. It was up from December’s reading of 0.4% and an increase of 0.2% m/m in November. The upside surprise was driven by services prices, which rose 0.8% for the month, the largest increase since July 2025. In contrast, goods prices declined by 0.3% m/m, although if energy and food prices are excluded, goods prices rose by a substantial 0.7% m/m. The increase in PPI services inflation was mainly due to a 2.5% m/m in trade services, which effectively means producers are charging a higher margin. In practice, this is likely to reflect firms increasingly looking to pass through some of the higher input prices they expect due to tariffs. On an annual basis, PPI inflation came in at 2.9%. Overall, the PPI report indicates some continued pipeline tariff pressures, which could be reflected in sticky CPI data in the coming months. This is likely to keep the US Federal Reserve (Fed) holding rates in the first half of 2026, before cutting rates in the second half of 2026.‍
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• US consumer confidence, as measured by the Conference Board, rose by 2.2 index points in February to 91.2 – which is largely in line with the long-term average. The month-on-month improvement was partially attributed to less pessimistic expectations about future business and labour market conditions, as well as a more positive outlook for future income. However, Conference Board Chief Economist Dana Peterson noted that the index “remained well below the four-year peak achieved in November 2024”.‍
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• US weekly jobless claims rose marginally to 212 000 in the past week from 208 000 the prior week, in line with market expectations. Continuing jobless claims for the week ended 14 February - reflecting the total number of people receiving benefits - declined to 1.833 million, a drop of 31 000 from the prior week and below market expectations.‍
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• In Germany the Ifo Institute’s Business Climate Index rose to 88.6 in February, its highest level since August 2025 and up from 87.6 in January. Companies participating in the survey reported greater confidence about current business conditions, while expectations about the next six months also improved. The strength was broad-based, with both manufacturers and service providers reporting higher confidence.‍
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• Bank of England Monetary Policy Committee member Alan Taylor publicly suggested that the UK’s central bank may undertake three more interest rate cuts in 2026, as inflation drops back to the 2% target.
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• The Tokyo area core consumer price index (CPI), a leading indicator of nationwide trends in inflation, rose by 1.8% y/y in February, slightly higher than market estimates for a reading of 1.7%, but down from 2% y/y in January. The slowdown in inflation was due largely to renewed electricity and gas subsidies.‍
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• Japan’s Prime Minister nominated two economists perceived as dovish, Ayano Sato and Toichiro Asada, to the BoJ’s Policy Board to replace outgoing members. Some analysts interpreted the move as a signal that her government could be in favour of a less aggressive approach to interest rate increases. This prompted some press speculation about a potential impact on the central bank’s monetary policy normalisation process.
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• ‍In China the travel and spending data over the Lunar New Year, a key consumption period, provided mixed signals about consumer sentiment. Tourism spending rose to 803.5 billion yuan (US$117.4 billion), which is 126.5 billion yuan higher than in 2025, although this year’s holiday period was a day longer. In total, domestic tourists made 596 million trips nationwide in the nine-day period, 95 million more than a year ago. However, per-trip spending dipped marginally, raising doubts about the underlying strength of consumer activity.‍
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• Shanghai (the financial hub of China) has relaxed home buying rules, adding to recent measures to boost the property market. Non-residents who have paid social security contributions or income tax for one year will be eligible to buy a home in urban areas. Previously, non-residents had to wait three years. Shanghai will also allow non-residents who have made social security or income tax contributions for at least three years to purchase a second home.‍
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• The People’s Bank of China (PBoC) announced that it will cut the risk reserve requirement ratio for financial institutions conducting foreign exchange forward trading to zero from 20%. This decision signals that the bank is trying to ease the rapid appreciation of the renminbi. The PBoC said the adjustment takes effect on 2 March and it would aim to keep the yuan’s exchange rate stable at a reasonable and balanced level. On Thursday, the Chinese currency hit a nearly three-year high against the US dollar.‍

SA National Budget 2026/27 summary points:

• The South African Minister of Finance, Enoch Godongwana, presented his fifth National Budget on Wednesday, 25 February 2026. For the 2026/27 fiscal year the budget balance is projected to improve to -4% of GDP, down from a revised -4.5% of GDP in 2025/2026. In 2027/2028 the fiscal deficit is expected to continue to improve, dropping to -3.5% of GDP, before reaching an acceptable 3.1% of GDP in 2028/29. The latest outlook for the fiscal balance confirms that the minister intends to adhere to fiscal discipline in the medium term, although he acknowledged that it would still take several years before the level of government debt is at a comfortable and sustainable level. The minister also highlighted that the primary balance is expected to remain in surplus in the current fiscal year at 0.9% of GDP; and then the surplus will grow for the foreseeable future.‍
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• In 2025/26, tax revenue outperformed budget by R21.3 billion. This means that total revenue increased by 8.2% year-on-year, above last year’s budgeted increase of 7%. A breakdown of 2025/26 tax revenue highlights that the main categories of tax collection that led to the revenue outperformance include VAT, corporate income tax (CIT), and dividends tax. The minister provided relief for households from the impact of fiscal drag as well as increases to medical tax credits for the first time since 2023/24. This should provide individuals with R13.7 billion in tax relief, especially lower‐ and middle‐income households.‍
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• In 2025/26, government expenditure amounted to R2.58 trillion, which is a modest R0.145 billion more than the initial budget. In 2026/27 government is budgeting to spend R2.67 trillion, which is a relatively modest rise (3.5%) considering that over the past five years government expenditure has increased by an annual average of around 5.9%. The bulk of government’s spending is still allocated to education at R520.3 billion or 19.5% of total expenditure, followed by social protection at R446 billion (16.7% of expenditure) and healthcare at R301.3 billion (11.3% of expenditure).‍
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• Debt servicing costs continue to take up a large portion of government expenditure. They are projected at 16.2% of total expenditure in 2026/2027, up from 11.1% as recently as 2019/20. Positively, however, this has finally become one of the slower-growing areas of government spending, and is projected to grow by only 3.7% over the medium term. According to National Treasury, the slower growth reflects improved bond yields, an appreciating rand exchange rate, and lower inflation and interest rates.‍
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• SA’s gross government debt has risen appreciably over the past 15 years, increasing from less than 30% of GDP in 2008/2009 to 78.9% of GDP in 2026. The level of government debt is projected to peak in 2025/26 and remain above 75% of GDP for the next three years, moderating to around 76.5% of GDP in 2028.‍
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• Overall, the minister of finance presented a credible National Budget that aims to further entrench fiscal discipline, while at the same time shifting the government’s expenditure priorities away from consumption and into infrastructural development. The minister avoided the temptation to allocate significantly more capital to the various SOEs as wellas salary payments. Instead, he re-iterated the need to control expenditure inthe medium term, while continuing the path of fiscal consolidation. The success of this year’s Budget will be determined by government’s ability to retain fiscal discipline, while at the same time ensuring that key policy initiatives are implemented effectively.