Geopolitics continues to dominate the macro narrative

The military conflict between the US/Israel and Iran that erupted in late February continued to dominate the macro narrative throughout the second quarter, with market risk centred on the disruptions to maritime shipping through the Strait of Hormuz – and the resultant effect on global energy supply. However, quarterly checkpoints gloss over a phase of exceptional fluidity and market volatility, led by oscillating escalations and de-escalations in rhetoric and military conflict between the foes over the period. This fluidity was marked by the wild inter-quarter swings in Brent Crude Oil prices, which started the quarter at $101 per barrel, increased to an inter-quarter peak of $118 towards the end of April, and collapsed to $73 per barrel by the end of the quarter.

The quarter-end reprieve in global energy prices was spurred by a 60-day ceasefire and the official signing of a memorandum of understanding between the US and Iran, intended to pave the way for an enduring cessation of hostilities. Consistent with the ebb and flow of this saga, the relief has proved fragile: renewed tit-for-tat strikes in the closing days of the quarter, and ongoing disruption to shipping through the Strait of Hormuz, have imperilled the ceasefire and restored some geopolitical risk premium to markets heading into the third quarter.

The energy price shock follows the tariff-and-trade-related disruption that characterised much of 2025. These sequential price shocks bear the risk of structurally buoying inflation expectations and complicating monetary policy management in the developed world. Accordingly, the major developed market central banks have responded hawkishly, seeking to contain the second-round inflation effects that will ingrain persistent price pressures. While the Federal Reserve Bank (Fed) retained its 3.50%–3.75% target Fed Funds Rate during the quarter, the hawkish pivot under its new Chairman at the June meeting, was particularly noteworthy given the politicisation of his appointment and the rightful questions raised about the Fed’s independence in recent times. The early evidence cuts against the simplest politicisation thesis: against the will of the Trump administration for looser monetary policy, Warsh struck a suitably hawkish posture, quelling immediate concerns about the Fed’s inflation-fighting credibility. His resolve to maintain this stance, if warranted, is a key watchpoint in the quarters ahead.

The SARB acts decisively to stem second-round effects

The South African Reserve Bank (SARB) raised the repo rate by 25 basis points to 7.00% at its May meeting, its first policy rate hike since 2023. The hike was supported by a four-to-two majority, with a 50 basis point move also canvassed and debated by the Monetary Policy Committee. The SARB framed its decision as a pre-emptive measure to confront potential second-round inflation risk, safeguarding the SARB’s credibility and inflation-targeting credentials. Notwithstanding the spike in contemporaneous inflation outcomes, an elevated real repo rate continues to afford the SARB room to assess the pass-through of the energy shock, with second-round effects remaining the decisive watchpoint.

The domestic macroeconomic narrative was not uniformly dour. The reform dividend that underpinned 2025 remained intact, marked by Moody's assigning a positive outlook to the sovereign credit rating during the quarter, while the rand proved remarkably stable through the external turbulence.

Bonds shine as risk premium unwinds

The domestic interest-bearing market staged a strong recovery from the first-quarter losses. However, the recovery was neither linear nor obvious in real time. Notwithstanding the significant inter-quarter volatility, the nominal yield curve bull-flattened over the period, adjusting to reflect the perceived easing in geopolitical risk by the end of the quarter. Against this backdrop, the FTSE JSE All Bond Index (ALBI) returned 7.87% for the quarter – a spectacular reversal of the -3.36% returned in the first quarter. The FTSE JSE Inflation-Linked Index (IGOV) returned 6.60% over the period. The IGOV return was driven both by tightening real rates, and elevated inflation carry. Cash, proxied by the STeFI Composite Index, returned 1.67% for the quarter.