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Local Market Commentary
- Speaking at the launch of Africa GreenCo, an alternative off-taker for renewable energy in Zambia yesterday, Minister of Energy Peter Kapala said that the entry of the private sector into the Zambian electricity market will support the country’s development of a greener and diversified energy mix that supports jobs and investments. Kapala added that Africa GreenCo’s participation was a significant development and further underlies the government’s drive to create a supportive environment aimed at attracting private sector investment. Increased participation by the private sector in the electricity market could aid Zambia in addressing its power struggles in the near-to-medium term.
- The African continent’s biggest drugmaker Aspen Pharmacare Holdings Ltd. requires solid commitments within weeks from African governments for its orders of the coronavirus vaccine, or it will recommit that production line to more in-demand anesthetics. According to the head of strategic trade, Stavros Nicolaou, Aspen has been let down by the lack of interest in the shots, and with many countries having more shots than they have administered, it may not be economically viable to carry on with production. The situation could be a blow to Africa’s plans to catch up with more developed countries’ vaccination rates and preparedness for the possibility of future pandemics.
- The Fed poured cold water on the uber hawks last night causing a recalibration of global growth expectations and the trajectory of the dollar. This allowed the broader base metal complex to rise yesterday however nickel as the outlier, contracting by 1% on the day.
- This morning we have copper strongly bid. At the time of writing the 3m LME benchmark is up 2.65% at $9724.50/tonne. 3m aluminium is currently 2% higher and lead is up just over 1%.
- On the news front, Reuters reported the following – Global copper and nickel smelting activity rose in April even as COVID-19 lockdowns intensified in top producer China, data from satellite surveillance of metal processing plants showed on Wednesday. The latest COVID-19 outbreak in China, which accounts for a large portion of metals production, triggered lockdowns and other tough curbs that have caused havoc in supply chains. However, “for all the talk of COVID lockdowns, activity in China held up well in April,” said a joint statement from commodities broker Marex and SAVANT, the satellite analytics service Marex launched with Earth-i in 2019.
- The Fed hiked rates by 50bp as expected yesterday, its steepest hike since 2000. It also announced that it would start its balance sheet run-off from the first of June at a pace of $47.5bn a month. This is made up of $30bn of Treasuries and $17.5bn of mortgage-backed securities. The reductions for USTs will then be increased to $60bn a month after the first three months, while MBS reductions will rise to $35bn a month. It should be noted that there were no dissenting voices this time around, with all voting members backing a 50bp rate hike.
- In the FX markets, shortly after the FOMC decision, the USD capitulated and started what could turn out to be a deeper correction. Investors judged the Fed’s actions to limit inflation as more constructive than adopting a more cautious approach and have rewarded the Fed with a powerful response. Overall risk appetite levels have improved, and the Dow surged more than 930 points on the news. The relief rally in stock markets helped risk assets more broadly, and some EM currencies responded well. Both the EUR and GBP have staged a modest recovery against the USD, and these moves could also extend further. There was a lot priced into the USD before the meeting, and so there is now a need to price in the possibility that the Fed may not be able to act quite as hawkishly as it has signalled it would.
Rand and International FX Commentary
- Off its worst levels through Monday’s public holiday, the ZAR has appreciated almost seventy cents, forty of that unfolding overnight. Shortly after the Fed announced its decision to raise interest rates by 50bp, the ZAR staged a powerful recovery. Heading into the FOMC decision, the risk was always that expectations for the Fed were simply too high and that the slightest softening of stance might translate into the USD retreating. That softening might take the form of a less hawkish comment or decision, which in the end is what happened when Fed Chairman Powell ruled out the possibility of moving in 75bp increments.
- What was unusual was the guidance given and the specificity that there would be another two 50bp increases at the next two meetings. Quite clearly, the Fed believes that it is behind the curve and needs to catch up. Whether it will be able to announce these decisions without a significant fallout is debatable. With the economy so much more leveraged than ever before, the risk is that such an aggressive tightening will impact the pricing of assets and cause some undue volatility. However, in the early stages of this tightening phase, the Fed needs to rejuvenate its credibility as an inflation fighter for its guidance to be taken seriously and prove influential. It will need to follow through with this tightening over the next two months.
- Concerning the balance sheet roll-off, the Fed indicated it would reduce its balance sheet by $95bn per month starting in September. That is an aggressive roll-off and will now be baked into the price of US Treasuries. It remains to be seen just how they respond when the actual roll-off flows begin in September and whether yields are skewed any higher. The potential exists for some unpredictable wild volatility later this year, something that could affect emerging market currencies if overall levels of risk appetite collapse.
- The USD has capitulated for now, and the ZAR has taken advantage. It has begun a correction which will likely extend further before a fresh base is found. Even then, with so much priced into the USD, the risk is of a deeper correction than many anticipate, despite the Fed’s hawkish guidance. Although it will not happen all at once, a retreat back to 15.11 now looks possible. A break below that allows for a move back below 15.00.