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Geopolitics remains front and centre of global markets

March 7, 2022by Nicholas Kabaso
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Local Market Commentary

  • On Friday, Minister of Community Development and Social Services Brenda Tambatamba said that the government plans to place about 5mn  of its vulnerable population on welfare program this year. Tambatamba added that the government plans to scale the Social Cash Program this year by increasing the number of households  and that “the program is a key social protection intervention that targets vulnerable and incapacitated people in communities in order to alleviate suffering and deprivation.” Tambatamba further noted that the government had addressed the program’s challenges, which resulted in siphoning of funds and forced cooperating partners to withdraw funding in 2018. The government has taken a number of steps to strengthen the delivery systems, which has enhanced accountability and transparency.
  • In the FX market, the bearish bias seen on the Zambian Kwacha against the greenback last week is expected to persist this week as demand for hard currency continues to outweigh supply.
  • With the domestic data card empty at the start of the week, the focus is likely to rest on global developments. The stakes for the global economy remain high as the conflict in the Ukraine intensify. Global firms such as Netflix, KPMG and PWC have cut ties with Russia while Russian President Vladmir Putin has vowed to step up the bombing unless the city of Kyiv surrenders. Evacuations of some 200 000 people from the besieged city of Mariupol was halted as fighting continued. Reuters reported that Ukraine will ask the United Nations’ top court on Monday to issue an emergency ruling requiring Russia to stop its invasion, arguing that Moscow’s justification for the attack is based on a faulty interpretation of genocide law.
  • It is not surprising to see precious metals rallying hard as the safe haven status of gold gains additional prominence, while palladium touched a fresh high of $3172.22/oz this morning. Gold took a peak above the $2000.00/oz mark and we expect the category to remain well bid into the EU open.
  • Meanwhile, the US jobs report continues to signal that underlying momentum in the US labour market remains strong, adding more pressure on the Federal Reserve to hike interest rates. According to the Labour Department, the February non-farm payrolls report showed that 678k jobs were added to the US economy, notably higher than consensus expectations of 423k. The unexpected rise compares with an upwardly revised 481k gain in January (prior: 467k). The advance in payrolls was broad-based and came as Omicron cases retreated further in the weeks since the last jobs report.
  • The unemployment rate fell more than expected, from 4.0% in January to 3.8% in February, the lowest level in two years. Average hourly earnings fell from a downwardly revised 5.5% y/y to 5.1% y/y. Despite the recent drop, earnings growth remains elevated, further fanning concerns about the persistence of inflation.
  • The US remains heavily involved in helping Russia obtain military hardware including fighter jets. Furthermore, it is leading discussions with oil producers in a bid to reduce the dependence on Russian oil supplies and further strangle the supply of USDs into Russia in a bid to tighten the financial noose.
  • The USD surged on Friday and remained bid this morning, although it has retreated off its best levels. Although the Fed is still expected to hike given last week’s stronger than expected non-farm payrolls numbers, the Fed will carefully assess the GDP growth impact that the war is having to decide just how aggressively to tighten. This morning, the USD has retreated from its best levels and looks a touch expensive. Much will depend on the unfolding war in Ukraine and how much longer it lasts.

Rand and International FX Commentary

  • If there were any doubts the war on Ukraine would have global consequences, those have now been dispelled. Brent crude oil is trading above $130.00pb. It is a devastating blow to the global economy still smarting from the effects of the pandemic, which now needs to contend with the genuine prospect of stagflation as inflation is boosted, and central banks try and keep a lid on prices. It also highlights how a global solution to this war is needed. It has already progressed far beyond any previous wars like Iraq, Afghanistan, Lybia, and others whose trade linkages with the world were much smaller. 
  • One would ordinarily link it all through to a collapse in stock markets, a global rise in risk aversion, a dive for developed economy bond markets and a sharp correction in emerging markets. However, that is not unfolding. Equity markets are indeed responding by selling off, but it is questionable whether bonds are the safe-haven they used to be against a backdrop of rising inflation. Moreover, with the US yield curve flattening as aggressively as it is, it may well invert this week or next to point to another recession in the US.
  • Against this backdrop, SA appears to be holding up remarkably well. The reasons are clear. Commodity prices are surging higher. As the world battles high oil prices, coal prices have risen sharply. Equally, gold, PGMs and some industrial metals are also experiencing strong rallies as the world prepares for a shortage of such commodities. Amazingly, SA’s terms of trade shot up recently and, although off their best levels, are trading at levels that are likely to support the ZAR’s performance.
  • This morning, the ZAR is trading back above 15.4000 and again showing signs of wanting to break out to the topside. However, with commodity prices trading where they are and SA’s terms of trade as supportive as they are, SA might be looked at as a hedge against this current turmoil. SA’s fiscus could well receive further support from a robust mining sector to reduce one of the apparent risks to SA. At the same time, the ZAR would enjoy a substantial trade surplus and foreign interest wanting to shield themselves against supply shortages of grains, minerals and energy. Therefore, while it may seem obvious that the ZAR should depreciate due to a rotation from risk, how else would foreigners expose themselves to an opportunity in a commodity producer, if not in the likes of LATAM currencies or the ZAR? ZAR may indeed continue to impress.

Nicholas Kabaso

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