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Global focus rests on the U.S. response to Russia’s invasion of Ukraine

February 23, 2022by Nicholas Kabaso
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Local Market Commentary

  • While the domestic data card remains quiet today, it is worth noting that CPI and trade data are scheduled for later on in the week. The Bank of Zambia, earlier this week, kept its policy rate unchanged at 9.0%, citing a “sharp deceleration in inflation since December and some fragility in growth. While inflation is forecast to trend towards its 6-8% target range over the next eight quarters, it is worth noting that upside risks exist. These include adverse weather conditions, supply chain bottlenecks, surging energy prices, an anticipated increase in power tariffs, and a weaker Zambia Kwacha.
  • Looking at developments on the African continent, as part of efforts to gain more influence on the African continent and become a partner of choice, the European Union has pledged EUR 150bn for investment in Africa. Most of the EUR 150bn will go to the Global Gateway, Europe’s initiative to rival China’s massive investment plan in the continent and will support health, infrastructure, and the fight against climate change over the next seven years. Speaking at the EU-Africa summit in Brussels, European Commission President Ursula on der Leyen said that “as Africa sets sail on the future, the European Union wants to be Africa’s partner of choice.” However, it is worth noting that continent leaders were hoping for more, including vaccine patent waivers and the redirecting of billions of dollars of potential International Monetary Fund reserves from richer nations to more vulnerable ones to aid their recovery from the coronavirus pandemic.
  • Shifting to the FX market, the Zambian Kwacha kicked off the week on the back foot and may remain under slight selling pressure this week as offshore inflows from last week’s bond auction dry up.
  • On the global front, today the focus will turn squarely onto the U.S. response to Russia’s invasion of Ukraine. The occupation of the separatist regions of Donetsk and Luhansk has drawn criticism and condemnation from NATO more broadly, and we would expect a range of sanctions, starting with those from the U.S., will be imposed. That will likely draw some market response, and investors will position for another headwind to growth that will need to be priced in. Stock markets have started to correct but could lose more ground in the weeks ahead as this fluid situation unfolds and potentially intensifies.
  • A risk-off environment has seen the USD regain a firmer footing. Interestingly, the momentum behind the move is relatively muted at this point and does not give one the sense that the USD is about to surge stronger. Part of the reason why, may rest with how the Fed might interpret these events, and whether a significant market correction would see the Fed turn a little more cautious in their tightening. A more sluggish tightening would hurt the USD, and the dip in U.S. Treasuries may to some extent reflect that.

Rand and International FX Commentary

  • After a rambling and bizarrely unstructured address, Russian President Putin yesterday signed a decree officially recognising the Russian separatist regions of Donetsk and Luhansk in eastern Ukraine in a move that leaves Europe and Nato in a difficult position on how to respond. Furthermore, according to ABC, Putin has reportedly ordered Russian troops enter these rebel regions on a “peacekeeping mission” to help protect them, with tanks and other military personnel entering. Although Ukraine regards these regions as part of their sovereign state temporarily held by rebel groups, Russia has claimed them as their own and has encountered little to no resistance entering them. This now leaves Ukraine in a difficult position, and it will be interesting to see whether it has the stomach to wage a full-blown war against Russia for two regions that would prefer to be Russian.
  • Of course, the move has been condemned by European countries, the US and NATO at large as undermining 4kraine’s sovereignty, and sanctions will follow. In his address last night, Putin framed this as the most likely scenario and that sanctions would’ve been imposed regardless of what he did, implying that this was no longer a consideration. Just what sanctions are imposed will be interesting, but it seems at this point as though Russia is prepared to suffer the consequences.
  • Stock markets are down across the board. US Treasury yields are heading lower, and overall risk appetite levels have declined. Emerging market currencies will find themselves on the defensive while the USD is on the front foot. However, the ZAR now finds itself somewhat conflicted in that the gold price has rallied on this news. The ZAR has outperformed most currencies recently precisely because of the gold price, and this leaves investors to question whether they should trade on the gold price or the dip in risk appetite.
  • It appears as though the gold price is supporting the ZAR, but this may not be enough to fully offset the dip in risk appetite, which means that the ZAR finds itself on the defensive this morning. That being said, it is not a wholesale bearish environment with the longer-term trend still intact. The ball is now firmly in NATO and Ukraine’s court. If they do nothing from here, Donetsk and Luhansk effectively become Russian just as Crimea has, but risk aversion may again subside. However, all bets will be off if this is a precursor to a full-blown war with Ukraine.

Nicholas Kabaso

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