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Global market focus on FOMC meeting

January 26, 2022by Nicholas Kabaso
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Local Market Commentary

  • Data from the ministry of mines, seen by Bloomberg, suggests that Zambia’s main copper mines produced 800,696 metric tons of copper last year, a 4.5% drop from 2020’s output of 837,996 tons. According to Bloomberg, the ministry of mines declined to comment before the official release of the mining data. Note Zambia aims to boost copper production to two million tons a year by 2026.
  • Meanwhile, it was a mixed bag for the industrial metals complex yesterday. Nickel continued to shed ground while copper got a foothold and managed to finish the session in the green. This morning we have witnessed the red metal pivoting around the $9800.00/tonne level as investors adjust expectations and positions ahead of the all-important Fed announcement on rates and monetary policy in general later this evening.
  • Moving over to the U.S., this morning, newswires are awash with predictions and expectations of what the Fed might announce and the guidance it might give. The core expectation is that the Fed will reaffirm that it will end its QE taper by March and could raise interest rates at the same meeting. It would be a strong move by the Fed but shouldn’t come as much of a surprise as various FOMC members have repeatedly telegraphed it. Investors have priced in much of this hawkish action by the Fed, and the risk is that it signal’s caution in its approach rather than surprise with a more hawkish-than-expected statement.
  • Equity markets have already been through a significant bout of volatility as investors position for a slowdown. Although as tech companies now report, they could still impress with their results. By way of example, Microsoft comfortably beat expectations to the topside as tech remains core to future business operations. Furthermore, the wild ride seen on Wall St yesterday again did not result in a massive slump. The market rallied strongly off its lows to reiterate that there is still some bargain hunting demand on any dips.
  • What will also be of interest is the fact that the annual rotation of policymakers means that the bias for the Fed this year may shift even more hawkish as Esther George, James Bullard, and Loretta Mester will replace some of the more dovish members.
  • In the FX market,  it was interesting to note the behaviour of the trade-weighted USD yesterday. It was unable to sustain its intra-day surge. Ahead of the FOMC statement, there is a lot of hawkishness already priced into the USD, and it is far from guaranteed that some hawkish comments on their own will be enough to drive the USD to fresh highs. The price behaviour suggests there is some apprehension, which might also point to a slight reduction in overall levels of risk aversion and a reduced need for rotation to safety.
  • Locally, the Zambia Kwacha remains on the back foot, weighed down by a shortage of dollars. The local unit was the worst-performing currency against the USD yesterday, among the African currencies tracked by Bloomberg.

Rand and International FX Commentary

  • This morning, newswires are awash with predictions and expectations of what the Fed might announce and the guidance it might give. The core expectation is that the Fed will reaffirm that it will end its QE taper by March and could raise interest rates at the same meeting. It would be a strong move by the Fed but shouldn’t come as much of a surprise as various FOMC members have repeatedly telegraphed it. Investors have priced in much of this more hawkish action by the Fed, and the outside risk is that the Fed might signal some caution in its approach rather than surprise with an even more hawkish-than-expected statement.
  • Equity markets have already been through a significant bout of volatility as investors position for a slowdown. Although as tech companies now report, they could still impress with their results. On the contrary, Microsoft comfortably beat expectations to the topside as tech remains core to future business operations. Furthermore, the wild ride seen on Wall St yesterday again did not result in a massive slump. The market rallied strongly off its lows to reiterate that there is still some bargain hunting demand on any dips.
  • Lest we forget, the Fed feels comfortable enough to tighten because the FOMC feels that the economy is strong enough to withstand such tightening. The labour market is tight, and full employment is in sight, implying that consumptive demand will remain well supported. Stock futures in the US are once again in the green, and risk appetite has returned to some degree to help EM currencies stabilise ahead of the FOMC decision and statement.
  • In SA’s case, the SARB will take account of the Fed’s actions and guidance; however, SA has its own reality, and any decision to hike on Thu will also need to consider the weak state of SA’s economy. The IMF, for example, has cut SA’s growth forecast for 2022 to just 1.9% despite a softer 2021 base and has pencilled in just 1.4% growth in 2023. It implies that the SARB will need to remain sensitive to this reality, although doing so may leave the ZAR a little more vulnerable later this year if it detracts from carry attractiveness at the margin.

Nicholas Kabaso

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