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Domestic CPI data in focus later this week

January 25, 2022by Nicholas Kabaso
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Local Market Commentary

  • While the domestic data card remains quiet today, investors in Zambia will have to contend with the January CPI print and December trade balance data toward the end of the week. While Zambia’s inflation rate fell to a 14-month low in December, upside risks exist following the scrapping of fuel subsidies that had kept costs artificially stable for two years. The increase in fuel costs followed by a hike in transport fares of 18% to 34% were not reflected in the latest inflation reading as they happened after price data was collected by the statistics agency. That and a 13% increase in electricity prices expected in March, as well as a weaker currency, could boost inflation.
  • Meanwhile, Zambia yesterday received a fresh batch of coronavirus vaccines donated by the Chinese government. Zambia received 400,00 doses as part of the 1million vaccines pledged last year. Zambia‚Äôs health minister welcomed the donation and said that the arrival of the vaccines was timely as it comes at a time when the country has started administering booster vaccines as well as the introduction of the vaccines for children aged 12 years and above. The minister added that the government targets to vaccinate around 70% of the eligible population by June this year.
  • The industrial metals complex shed ground on a broad basis yesterday however the nickel counters were the hardest hit. The metal finished some 7% down yesterday closing at $22404.00/tonne and the bloodshed has continued in the Asian session hitting limits down on the Shanghai Exchange. Prices dropped by some 5.8% in Shanghai hitting the circuit breakers, the benchmark 3m LME price is currently down 1.18%, $22140.00/tonne as we head into the EU open. The major driver of the losses in nickel is the expectation that the historical supply squeeze may be coming to an end. 
  • Moving over to the US, Wall St took a heavy beating through yesterday’s trading session, only to recover strongly to end in the green. Such a strong rejection of the lows suggests there is demand to bargain hunt, and investors didn’t waste much time. It has now sparked serious debate amongst the Wall St elite on whether the Fed’s actions will automatically result in a major Wall St correction or whether Wall St will continue to climb the wall of worry given the global economic recovery, which will support earnings. History shows that there will be some volatility through the monetary policy transition, but that it need not translate into a long-lasting correction, with the Fed likely to be sensitive to the market reaction that their communication results in.
  • In the wake of Wall St’s volatility, USTs were surprisingly calm. They did post a slight recovery in response to the Wall St losses but gave that all back once Wall St recovered to finish the session in the green. Taking anything too seriously in the run-up to the FOMC decision and statement on Wed is dangerous, and USTs alongside Wall St may choose to trade some water over the next two days as they await fresh guidance. There are many risk factors to contend with at the moment. The FOMC is one, but developments in Easter Europe and Ukraine are too.
  • In the FX markets, the Zambian Kwacha extended its sell-off to close north of the 17.500 mark at the start of the week as demand for hard currency remained higher than actual inflows.
  • Meanwhile, expectations of a hawkish Fed that will tighten monetary policy and geopolitical developments between NATO, the U.S. and Russia concerning Ukraine is keeping the safe-haven bid alive, and the USD has benefited. Although the USD did retreat slightly off its best levels overnight, it remains more buoyant than it closed last week and is trading back in the familiar trading range it consolidated in for much of December and January. Clear-cut direction may only follow the FOMC statement on Wed.

Rand and International FX Commentary

  • Ahead of the FOMC decision tomorrow, it is telling that US equity markets sold off hard but were unable to hold those losses. On the contrary, after losing almost 4% through the day, Wall St ended higher, marking a very strong low point that was rejected. Risk appetite has quite clearly not disappeared completely, and investors have used the latest sell-off as another opportunity to establish fresh long positions. The move through the course of the past two weeks also serves as a warning to central banks of the fall-out, which may follow if they seek to remove monetary policy too aggressively. Through yesterday’s trade and overnight, the ZAR showed sensitivity to the moves on Wall St.
  • The recent volatility in global equity markets could also have a bearing on the language used in the Fed’s communication on Wed. The bounce back off the lows shows that there has been a lot priced in. Any communication which is sensitive to the growth outlook will likely generate a fresh surge in US equity markets and once again help bolster risk appetite. This has a bearing on emerging market currencies that will respond positively to any improvement in risk markets.
  • In Asia this morning, stock markets are still in the red, with investors fretting about a combination of the Fed and the tensions in Ukraine. These are indeed uncertain times, and the natural default is to turn conservative. However, with the global economy still recovering, corporate earnings are likely to hold up reasonably well, especially in the face of improved labour markets that will help prop up consumption. 
  • It is not yet clear that Putin is ready to go for broke on the geopolitical front. He has much to lose and an entire world worth of sanctions to face shortly after the pandemic, which cannot be an appealing prospect. Instead, he will be placing a lot of pressure on NATO to de-escalate its troop build-up on its border and to use the gas pipeline into Europe to leverage his position and as another bargaining chip. At this stage, it still seems more likely that these are part of negotiation tactics rather than a plan for all-out war. While the headlines remain negative and fear-mongering, they will attract negative speculation and trigger volatility. However, any breakthrough in the coming weeks or even months could also help propel equity markets higher and help EM currencies appreciate against the safe-havens, including the USD.

Nicholas Kabaso

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