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Fears of a collapse in demand in China weighs on base metals

March 15, 2022by Nicholas Kabaso
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Local Market Commentary

  • Zambia has declared seven days of mourning following the passing of the country’s fourth president Rupiah Banda. President Hakainde Hichilema declared the period of national mourning and said that Banda’s state funeral will be held Thursday, and he will be buried Friday at the presidential burial site at Embassy Park.
  • Meanwhile, Word Bank Executive Director Eva Valle-Maestro has applauded President Hichilema for his economic recovery efforts and indicated the bank stands ready to ensure that Zambia is financially supported. Valle-Maestro added that efforts such as restoring the rule of law and fighting should be commended.
  • Shifting to currency market developments, the Zambian Kwacha (ZMW) started the week on a strong footing, paring some of the recent losses to end as the second-best performing African currency tracked by Bloomberg. Despite the gains on the session, a broader bearish bias remains entrenched on the ZMW, with the local unit down by almost 8% on a year-to-date basis as demand for hard currency outweighs supply.
  • In the base metals complex, focus has shifted has shifted to China as soaring COVID-19 cases and the subsequent lockdown’s by Beijing have raised fears of a collapse in demand from the world’s second largest economy. Copper and aluminium had a difficult trading session with aluminium underperforming by a wide margin shedding some 4.81% on the day to close at $3319.50/tonne. Copper slipped below the $10000/tonne mark to close at $9935.00/tonne.
  • This morning there was a slight push to the topside, but that has since faded, aluminium and copper are trading flat into the EU open. All eyes will be on the next round of Ukrainian/Russian talks which are to resume today and come as the EU states have agreed on a fourth package of sanctions against Russia.
  • There is a lot unfolding in the U.S. at the moment, but much of it is geopolitically driven. The U.S. has held 7hr talks with China concerning developments in Ukraine and will have made its point clear that it will not look kindly on any assistance China offers Russia as it would undermine Western efforts to stop the war. On a separate issue, but interrelated, Iran has left the ball in America’s court to make a decision on reopening negotiations on a fresh nuclear deal, although Russia has imposed demands that Iranian trade with Russia would not be affected by sanctions. It is a difficult geopolitical climate all around.
  • Although buoyant, the USD does appear to have run into some headwinds and may struggle to make further headway in an environment that could still see overall levels of risk aversion subside. All eyes will be on the war in Ukraine and, of course, the Fed’s decision on interest rates. In the latter part of the week, we would expect the combination to decide the general bias on the USD-ZAR.

Rand and International FX Commentary

  • Throughout the past three week War in Ukraine, the ZAR has proven impressively resilient. It remains impressively resistant to volatility and continues to trade at levels many would’ve regarded as impossible a few years back. However, buoyant commodity prices, weak domestic demand, and reduced fiscal risk have seen foreigners reluctant to sell SA assets. Furthermore, stock markets have sold off and are already pricing in a lot of negative growth consequences, so there is a lot of risk already priced in.
  • Against this backdrop, one might ask what sort of catalyst is needed to spark a significant sell-off in SA assets and whether the ZAR is still vulnerable to future volatility? The ZAR may be trading like a safe haven at the moment and for justified reasons, but it also remains extremely vulnerable to the country’s social inadequacies, including the enormous size of the poor and underprivileged population relying on government grants for survival and the enormous disparity between rich and poor.
  • Inflation remains buoyant, and while the outlook might’ve looked significantly worse had the ZAR not remained resilient, it is high enough that poor households will notice. After two years of Covid and record levels of unemployment, the situation was already stressed. The risk is of a repeat of the July 2020 riots sparked by the constant drain on household disposable income. We do not regard this view as core at this point, but rather meant to implore readers and investors not to turn complacent, just because SA has weathered the consequences of Ukraine’s War more comfortably than many other countries.
  • SA is simply a country that found itself in the right place at the right time in a fortuitous alignment of stars, rather than the ZAR’s stability reflecting anything more. Investors must not forget that SA remains fiscally and socially fragile as a country. That being said, all eyes in the coming days will rest with the Fed, BoE and BoJ and the guidance they offer global markets collectively. In the latter part of the week, we would expect the combination to decide the general bias on the USD. 

Nicholas Kabaso

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