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African Exchanges Linkage Project aims to address liquidity issues and encourage market integration

June 14, 2022by Nicholas Kabaso
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Local Market Commentary

  • Secretary to the Treasury Felix Nkulukusa yesterday indicated that a date for the first meeting of Zambia’s official creditor committee had not been set yet. Nkulukusa was quoted as saying, “we are waiting for the Paris Club secretariat to give us that information.” Note that France, which hosts the Paris Club forum for international creditors, and China are co-chairs of the bilateral negotiations to restructure Zambia’s external debts, which reached $17.27bn at the end of last year, according to government data. Meanwhile, a presidential spokesperson said the meeting was likely to occur before the end of June. The Zambian government had previously repeatedly said that it hoped the negotiations would be finished by that time. Zambia needs financing assurances from official creditors to secure approval from the International Monetary Fund board for a $1.4bn bailout package.
  • The industrial metals complex all finished the start of the week lower once again as the threat of tighter monetary policy hit home after inflation in the US hit a 40-year high. The benchmark 3m LME copper price slipped below the $9300.00/tonne handle however the red metal has managed to dust itself off this morning and regain the $9300.00/tonne mark. Currently, we have 3m copper changing hands at $9324.00/tonne as the EU open beckons.   
  • In regional news, the African Exchanges Linkage Project (AELP) has made its way back into headlines after the Botswana Stock Exchange, and Ghana Stock Exchange joined the project at the end of May. The AELP aims to facilitate cross-border trading from one African securities exchange to another to integrate African capital markets. ASEA President Edoh Kossi Amenounve recently said that the facilitation of cross-border trading would open up the markets to a diverse portfolio and investment opportunities.
  • Kossi Amenounve added that brokers and investors would be able to access a variety of asset classes available in their markets of interest. Increased and regular cross-border trading is expected to enhance liquidity in the member exchanges. Illiquidity remains a key issue for many African stock exchanges, given that financial markets are in many countries still in their development stages. The linkage of Africa’s largest and most liquid securities exchanges could boost liquidity and draw in more international investors.
  • That said, there are still some shortcomings of the project that are yet to be addressed. The AELP will not directly ameliorate some factors hindering African capital markets, including high transaction costs and difficulties in repatriating foreign currency. History shows that the more liquid a market is, the lower the costs of transactions. In a liquid stock market, the market can absorb large trade volumes with minimal effect on price movement.
  • The Johannesburg Stock Exchange is Africa’s most liquid stock exchange. Trade volumes are still significantly higher than the subsequent two largest African exchanges, the Nigerian Stock Exchange and the Egyptian Stock Exchange. While the Johannesburg Stock Exchange is Africa’s most liquid stock exchange, South African stocks (24%) were outperformed by Malawian (32%), Ghanaian (39%) and Zambian (93%) stocks last year. The solid performance of the African bourses in recent years is attracting the attention of international investors.
  • The inclusion of the two exchanges is a sign that capital markets in Africa are becoming more integrated. This should help with liquidity constraints and encourage cross-border trading and movement of capital. There is now a total of 9 member stock exchanges. The member countries are Botswana, Ghana, South Africa, Morocco, Egypt, Kenya, Nigeria, Mauritius and the WAEMU Region (Benin, Burkina Faso, Côte d’Ivoire, Guinea-Bissau, Mali, Niger, Senegal and Togo).
  • In the FX markets, a surging USD caused more bloodshed across global currency markets yesterday as traders brace themselves for the potential of an outsized rate hike this week. With the exception of the JPY, no G10 currencies were spared yesterday, with the EUR and GBP losing -0.78% and -1.14% on the session as the USD rose to a near 20-year high. Emerging market currencies were also a sea of red yesterday, with the likes of the BRL (-2.51), MXN (-2.30%) and the CLP (-1.84%) amongst the biggest losers on the day. The sell-off in crypto also deepened on the back of yesterday’s USD strength, with bitcoin shedding another 15%. While the broader bullish bias remains intact, the topside bias in the USD has stalled this morning, providing some temporary breathing room for battered currency markets. Heading into tomorrow’s FOMC meeting, the market is pricing in a more hawkish move, with consecutive 75bps rate hikes in June and July now close to fully priced in. Therefore, the risk heading into the FOMC meeting is that policymakers are less hawkish than the market is pricing for, which would result in a correction in the USD in the days that follow. The base case however is for the USD strength to persist in the near term as inflation in the US continues to run hot.

 

Rand and International FX Commentary

  • The ZAR remained in free fall yesterday, struggling to hold its own against a towering USD at the start of the new week as the market continued to digest Friday’s US CPI shock. The higher-than-expected inflation print prompted positioning for an even more aggressive Fed rate-hike path, driving the trade-weighted USD to its highest in two decades. 
  • Talk of a potential 75bp Fed rate hike as soon as this week has been making the rounds, and is nearly fully priced in as of this morning. Accordingly, many market agents have started short-covering their positions or booking profits on the recent USD rally, holding the view that the Fed may be slightly more gradual in its monetary tightening than what is currently priced in. 
  • This has allowed for a slight ZAR recovery overnight, with the local unit gaining from yesterday’s intraday lows of around R16.1800/$ to levels closer to R16.0000/$ this morning. However, given the uncertainty over what the Fed meeting will produce on Wednesday, volatility will likely remain heightened through the first half of the week (especially as liquidity conditions may be thinner than usual due to the upcoming public holiday in SA).
  • The policy challenge for the Fed is that is difficult to estimate just how much monetary tightening is needed to curb prevailing inflationary pressures – something it will only find out long after it raises interest rates. The risk is thus that it hikes interest rates too aggressively in the early stages of the monetary tightening cycle to restore its credentials as an inflation fighter, and ultimately triggers a recession down the line. These concerns were reflected in an inversion of the US Treasury curve yesterday, which suggests that the market is bracing for the prospect of a significant economic downturn in the near future.  

Nicholas Kabaso

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