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Local Market Commentary
- In the base metals complex, copper prices stabilised yesterday however there has been some pressure noted in the Asian session this morning as the metal tracks the performance of the dollar. Underpinning the metal is the low inventories globally however these have been recovering off the lows seen last year which caused a massive spike in cash over 3m Forwards in the copper market.
- The first trading session of the week saw the Zambian Kwacha remain on the defensive, and this is likely to persist this week due to reawakening dollar demand from companies across all sectors as they return from the traditional festivity break.
- Moving over to the U.S., following the long-weekend holiday, trading volumes are expected to normalise and bring to an end all the holiday-disrupted trading seen so far through Jan. Focus will quickly turn back to the data and especially the upcoming earnings results for a clearer, real-economy perspective on the economic environment. Indications are that the U.S. economy is holding up well and that earnings results will continue to support the high valuations currently evident across stock markets.
- While the U.S. manufacturing sector ended the year on a positive note amid signs of improved supply chain conditions and evidence that input and output price growth has started to ease, risks heading into the new year remain elevated. Consensus expectations suggest that conditions in the manufacturing sector likely deteriorated at the start of the new year as new Covid-19 outbreaks both domestically and abroad dampened the outlook for the sector. Adding to the headwinds is the removal of stimulus and the eventual hiking of interest rates which could come as soon as March. That said, while there are a number of downside risks still present, we remain bullish on the sector as the U.S. economy continues to recover.
- In other news, the airline industry is facing a new challenge in the form of 5G and the impact on grounding certain wide bodied planes. The industry can ill-afford more disruptions as it gradually recovers from Covid restrictions and disruptions. The airlines have asked that 5G be limited to the outskirts of a 2-mile radius until adjustments to instrumentation and other technically sensitive devices are made.
- The USD has taken courage from the rise in UST yields that continue to point to a rapidly tightening Fed and interest rates that will be adjusted accordingly. Equity markets also appear to have lost some of their lustre and overall levels of risk aversion have risen slightly. The environment remains ripe for a further recovery in the USD that is now unwinding most of last week’s sell-off.
Rand and International FX Commentary
- The USD-ZAR appears to have found a bottom in the very short term. The pair has repeatedly struggled to sustain a break below 15.3500, and the same applied yesterday. This morning, the pair is trading above 15.4200 with some weakness in Asian markets, raising risk aversion to nudge investors out of emerging markets. Focus through the week will turn to the local data in the form of retail sales, CPI and mining production, but arguably just as important will be the earnings results on Wall St.
- A strong set of earnings on Wall St will almost certainly bolster risk appetite and could help sentiment towards emerging markets. US markets are already fully positioned for a strong economy that could withstand higher interest rates. But for a commodity currency like the ZAR, a strong global growth performance is good news for commodity prices and SA’s terms of trade that have shown modest signs of rising back up recently.
- Investors should also keep one eye on political developments currently doing the rounds. The RET faction, seemingly championed by Lindiwe Sisulu is causing some angst within ANC ranks and doing little to foster a constructive environment in which confidence in SA’s longer-term future can build. Although this would not be market-moving just yet, it is laying the foundations for an internal ANC tussle that will likely intensify as the year wears on.
- Intra-day, there is not much market-moving information to trade on, which implies that the bulk of direction may come from abroad and the behaviour of the USD itself. Currently, the USD appears to be clawing its way back out of its recent slump, albeit cautiously. Nonetheless, it is enough to prevent the ZAR from appreciating any further vs the USD, and that should assist the pair in further building the base alluded to above.