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Local Market Commentary
- To bolster its fight against the coronavirus pandemic, Zambia is considering the possibility of introducing booster vaccines. Health Minister Sylvia Masebo on Friday said that technical experts were currently holding consultations on the issue and that the government will soon provide related policy recommendations. Masebo added that the decision on whether to administer booster vaccines or not will take into account individual risk groups, vaccine availability, vaccination coverage, among others. Note, Zambia has started to see an upward trend in COVID-19 cases following reports of the presence of the new Omicron variant in the country.
- To strike a debt relief deal, a group of Zambia’s international creditors on Friday said that Zambia would need to provide more details on its recently agreed IMF support programme and its own economic plans. The group, made up of international funds that own the country’s now-defaulted sovereign dollar bonds, said it was also crucial that the likes of China, which has also lent heavily to copper-rich Zambia, provided the same degree of debt relief. According to a statement by the external bondholder committee, “to establish a process in which all parties have confidence, the Committee expects the authorities to engage in simultaneous discussions with the Official Creditor Committee for Zambia and the Bondholder Committee with equality of information disclosure for both groups.” However, the Committee did indicate that it was pleased with the Zambian government’s progress to restoring macro-economic stability so far.
- In the base metals complex, copper finished the Friday session in the red shedding 0.3% to close at $9506.50/tonne, these losses have been reversed this morning as investors price for additional stimulus out China which is expected to materialise early in 2022. Flows have been on the light side with investors preferring the comfort of the fence ahead of all the central bank activity this week. We are also moving deeper into December where the end of year holiday’s traditionally sap liquidity.
- Moving over to the US, last week’s inflation reading confirmed that price pressures were elevated and that the Fed would need to respond with some policy changes if it is to retain its status as an inflation-fighting central bank. Recent polls show that the FOMC may well speed up the pace of tapering and that the dot plots could well point to the prospect of at least two rate hikes before the end of next year. The combination of strong economic data, a tightening labour market and buoyant inflation means that the Fed has an opportunity to normalise monetary policy with some conviction through 2022.
- On the fiscal front, U.S. Congress has paved the way for the debt ceiling to be raised this week. U.S. Treasury Secretary Yellen advised that it should be done before Wednesday, and it now appears that this will be possible. The bill that passed through the Senate last week makes it easier to raise the debt ceiling through a simple majority which means that the risk of this becoming a problem, given the simple majority the Democrats enjoy, is low. This now ceases to be a risk factor to look out for.
- In the FX markets, at the start of an FOMC week, the USD has resisted the temptation to sell off, even though it may be trading in overbought territory. Technically, the trade-weighted USD could complete a bull flag formation and enjoy another leg stronger before the end of the year. It may require some assistance from the Fed on Wed, which is likely to sound a more hawkish tone as it seeks to accelerate the taper and bring forward the timing of rate hikes. The combination may well lend the USD more support, despite how much growth-positive news has already been priced in.
- Meanwhile, last week’s bullish bias on the Zambian Kwacha is expected to persist this week on the back of positive sentiment on news of preliminary understanding between the IMF and Zambia for an aid programme.
Rand and International FX Commentary
- Event risk in the US last week passed with some initial knee-jerk reactions quickly washing out of the market to leave the ZAR largely range-bound. As is often the case in this Covid-dominated world, the weekend can often throw up new challenges and considerations, and this weekend did not disappoint. Headlining the list was news that President Ramaphosa has contracted Covid-19 and is being treated by the military medical team for mild symptoms. Deputy President Mabuza will take the helm while Ramaphosa is recovering. It is unclear whether Ramaphosa has contracted Omicron but appears to have contracted it domestically.
- Staying with the topic of Covid, Qatar airways made an about-turn on their decision to fly to SA and has suspended flights once more until the end of the year. Any thoughts for international travel both to and from SA have been dealt a blow, although truthfully, it did not take long for Qatar to reverse their decision, and the decision is more of a symbolic one than it was substantive.
- Through the week ahead, investors will now look to the outcome of the Coronavirus Command Council meeting and the anticipated announcement of a raft of new restrictions not dissimilar to those announced in the UK over the weekend. SA will likely be placed on at least level 2 and may even shift back to level three, given the rate of infections. The one major mitigating factor is that Omicron does not appear to be resulting in serious illness, nor has it translated into a massive spike in infections. Earlier curfew, restrictions on the size of public gatherings, some restrictions on alcohol sales and one or two others are anticipated. Preventing inter-provincial travel is the risk, although, given the low level of hospitalisations, the tourism sector will be hoping that is not announced.
- Sentiment towards SA will remain on the defensive given the threat of stricter restrictions, and it is telling that the ZAR struggled to recover. Also of some interest, this week will be the release of the latest inflation data. A soft reading will almost certainly count against the ZAR. The balance of risks this morning appears to be against, rather than for the local currency. Investors are reminded that the credit cycle in SA is particularly weak, as are both consumption and investment. The combination implies weak growth in M3 money supply, which confirms that there is not much room for inflation to take hold. Although good for SA in that it promotes longer-term price stability, it also means that SA may not need to hike rates robustly to keep inflation in check. At the margin, that might count against SA’s carry attractiveness, especially if commodity prices ease and SA’s terms of trade erode once again.The IMF recently warned SA not to rely on commodity prices to remain buoyant indefinitely to generate growth and focus on reforms. However, it is questionable whether such reforms will come soon enough to prevent the ZAR from losing ground over the next 6-9 months.