US monetary policy shocks send ripples across South African markets

South Africa’s financial markets have faced intensified volatility from United States monetary policy shifts since the onset of COVID-19, according to a new peer-reviewed study published in the International Journal of Financial Studies. The research dissects how both conventional and unconventional US policy actions have sent systemic ripples through South African equities, bonds, and currency markets during a period marked by global uncertainty.

The paper, titled “Has US (Un)Conventional Monetary Policy Affected South African Financial Markets in the Aftermath of COVID-19? A Quantile–Frequency Connectedness Approach,” delivers a granular analysis of daily market data from December 2019 to March 2023, applying a novel quantile–frequency framework to uncover how policy-driven shocks travel across different market states and time horizons.

Mapping US monetary shocks to South African assets

The study sought to answer a pressing question: how deeply do US monetary policy moves influence South African financial markets, and under what conditions are those effects most severe? To capture this, the authors used the shadow short rate (SSR), a dynamic measure that integrates both traditional rate movements and unconventional tools like quantitative easing.

By applying this measure to key South African market indicators, including the JSE All-Share Index, FTSE SA, MSCI South Africa, the S&P South African Sovereign Bond Index, the 10-year government bond, and USD/ZAR currency pair, the analysis captured short-term volatility and long-cycle patterns with precision.

The methodology allowed the researchers to observe transmission patterns during distinct market conditions, bearish, neutral, and bullish, revealing that spillovers from the US were not evenly distributed. Instead, the most severe effects occurred during moments of market stress, particularly in the early stages of the pandemic and during subsequent policy shifts such as tapering and rate hikes.

Intense spillovers during crisis conditions

As per the research, the United States acted as a net transmitter of financial shocks during the review period. This was most evident in periods of heightened uncertainty, including the early pandemic months of 2020 when the Federal Reserve launched large-scale asset purchases, mid-2021 during tapering signals, and the mid-2022 phase of aggressive rate normalization.

The data showed that bond and currency markets were the most vulnerable to these transmissions, consistently absorbing the brunt of US-origin shocks. Equities, while affected, demonstrated relatively more resilience, though they still reflected elevated volatility in extreme conditions.

High-frequency spillovers, representing rapid, short-cycle market reactions, dominated much of the transmission, indicating that policy announcements and sudden shifts in sentiment had immediate and pronounced effects. However, during periods of policy recalibration, such as rate normalization phases, longer-cycle, persistent spillovers emerged, leaving lasting impacts on South African assets.

This dynamic response pattern underscores the systemic interconnectedness of global markets and highlights the structural sensitivity of emerging market economies like South Africa to external monetary shifts.

Policy and market implications

For policymakers, the findings highlight the importance of adaptive macroprudential frameworks that can anticipate and respond to externally driven shocks. The South African Reserve Bank and financial regulators are advised to enhance monitoring systems during periods of global policy change, especially when US policy signals sharp adjustments to rates or liquidity conditions.

The study also carries critical insights for institutional and retail investors. With US policy cycles exerting measurable influence on South African bonds and currency, risk managers should integrate state-dependent strategies that account for heightened volatility during extreme market conditions. Hedging mechanisms and diversified portfolio allocations become essential tools to mitigate short-term turbulence and protect against prolonged disruptions.

Moreover, the research provides a methodological breakthrough by incorporating quantile–frequency connectedness, offering a richer and more nuanced understanding of transmission patterns. This dual-lens approach, which examines how shocks propagate across both market states and temporal frequencies, helps market participants anticipate not only the severity but also the duration of external shocks.

A new perspective on spillover dynamics

While earlier studies have explored the global transmission of US monetary policy, this work stands out for its focus on emerging market dynamics during a period of unprecedented policy interventions. By capturing both conventional and unconventional policy actions, the research demonstrates that spillovers are often underestimated when analyzed through average-based models.

The study’s evidence that tail-risk events, such as crises and policy pivots, amplify systemic shocks calls for a rethinking of traditional risk assessment frameworks. Investors, analysts, and regulators alike can benefit from integrating quantile–frequency models to better navigate increasingly complex global financial linkages.