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Fed policy path to present some great buying opportunities

June 16, 2022by Nicholas Kabaso
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Local Market Commentary

  • Rothschild & Co. South Africa have been hired by ZCCM Investment Holdings to undertake a strategic review of Mopani Copper Mines. The review aims to provide options that will ensure Mopani is operating optimally, and the process will be concluded within six months, with the option to extend it for a further six months. Rothschild & Co’s involvement is not expected to disrupt business operations at the mine. In April, ZCCM-IH said it was seeking a financial adviser to restructure Mopani and help find a new external investor for the mining complex, which Glencore had sold back to the state in January last year. 
  • Expectations are that Zambia will secure approval from the IMF for a $1.4bn loan and associated economic program by August or September, according to FinMin Musokotwane. At a briefing yesterday, Musokotwane added that he does not see talks with official creditors to provide Zambia with the financing assurances it needs to get IMF approval taking longer than a month. At the same briefing Antoinette Sayeh, deputy managing director at the IMF, was optimistic a board discussion in early September would be possible. Distributing program documentation to the IMF board will be the next big step forward and could happen at the end of July or early August.
  • It was an eventful night as the Federal Reserve turned even more hawkish, hiking by 75bp to take the Fed Funds range to 1.5% – 1.75%. This was the largest hike since 1994 and aligns with new wording in the statement that says that the Fed is ”strongly committed to returning inflation to its 2% objective.” There was one dissenting vote, coming from Kansas Fed President George, who voted for a 50bp hike.
  • The new dot plot projections released showed sharp increases from the March release, with the Fed Funds target rising to 3.4% by the end of the year and 3.8% by the end of 2023. The prior forecasts were for a rate of 1.9% for the end of this year and 2.8% for 2023. Powell’s press conference, meanwhile, saw some interesting developments. During the Q&A, the Fed Chair suggested that although another 75bp may be on the table for the next meeting, such moves will not become commonplace. Powell also noted that it was decided to do more “frontloading” of hikes now to contain inflation expectations.
  • Given how aggressively the markets were priced for tighter policy, the comments from Powell have actually supported risk sentiment, with the USD and US Treasury yields closing Wednesday’s session lower. While emerging market bond yields traded lower yesterday, the broader bearish bias remains intact. The confluence of a hawkish Fed, the post-pandemic surge in inflation, tightening financial conditions and mounting fiscal costs suggest that the pain for emerging market bonds is still far from over.
  • The turmoil in global financial markets has prompted a sharp sell-off in African Eurobonds. A widely used African bond index shows that African dollar-denominated bond yields have surged to levels last seen during the ’08 Great Financial Crisis, with the sell-off now exceeding that seen during the peak of the Covid pandemic. The aggregated African Eurobond Yield Index is trading at around 12.75%, almost 500bps higher than levels seen at the start of the year.
  • Given the fragility of financial markets, the risk is that current dynamics can trigger more bouts of panic amongst investors and sudden flights of capital from countries most vulnerable. 
  • This includes countries such as Egypt, Ghana and countries in East Africa that are net importers of oil and food. While the pain for African Eurobonds is expected to endure in the months ahead, we expect the tide to turn in the latter part of 2023, with global monetary policy expected to do a 180. This should present some great buying opportunities for fund managers and fixed income traders in the months ahead.
  • In the FX markets, the Zambian Kwacha closed on the back foot along with many African currencies yesterday. The USD has continued to edge lower this morning as markets digest the Fed’s 75bps rate hike and the forward guidance provided by Powell in the press conference accompanying the rate decision. The correction lower in the USD clearly indicates that the market was fully priced for a 75bps hike. While the USD has pulled back from its recent peak, the broader bullish bias in the greenback remains intact. Monetary differentials between the US and other major economies are expected to remain wide in the remaining months. Although this suggests that the USD will remain lofty in the near term, the USD is significantly undervalued. Moreover, the US continues to run massive twin deficits. All of which suggests that there is scope for a meaningful correction lower in the USD should the Fed turn less hawkish in the months ahead as recession risks intensify. Expect volatility across currency markets to remain elevated, particularly in emerging and crypto markets.


Rand and International FX Commentary

  • South African markets are closed on account of the Youth day public holiday. 

Nicholas Kabaso

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