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Local Market Commentary
- It was a relatively uneventful day in Zambia amid a dearth of domestic data yesterday. Against this background, it is worth looking at ETM’s analysis of the copper market, given that Zambia is a major exporter of the red metal.
- Apart from the structural tailwind that copper is expected to enjoy over the coming years there are short term factors which are currently in the spotlight. Copper inventory levels have fallen by some 60% and are currently sitting at 80025/tonnes at LME approved warehouses. The draw in inventories correlates strongly with smelting activity, global smelting activity hit a 13 month peak in January with operations in China ramping up sharply ahead of the seasonal construction demand.
- Equally there are concerns over supplies, there is still no resolution to the standoff in Peru which has resulted in the halting of operations at the MMG owned Las Bambas mine. There is also talk of Chilean mine nationalisation as the socialists eye the country’s lithium and copper assets. We do not see this as having much success.
- All of these factors have kept the spot price of copper at a premium to the 3m LME forward, but we have moderated sharply off the highs of Oct 2021. Looking at a chart of copper for the past twelve months we see that $9500.00/tonne is a strong pivot point with the red metal rarely dipping below this level for any extended length of time. Given the low inventories and the supply issues we expect investors to find $9500.00/tonne as a good level to accumulate.
- In the local FX market, the Zambian Kwacha extended its sell-off north of the 18.000 mark as demand for hard currency amid limited supply continues to weigh on the local unit.
- U.S. CPI headline the global data card today. Consumer prices soared in the U.S. last year by the most in nearly four decades. Extremely high inflation across the globe is setting the stage for the start of the Fed’s tightening cycle, with the first hike expected at the March meeting, as officials acknowledge that price pressures have failed to fade as initially expected. The expectation is for CPI growth to start to moderate over the course of 2022, this will, however, depend on supply chain normalization and energy prices levelling off. Higher rents, robust wage growth, subsequent waves of Covid-19, and lingering supply constraints all pose upside risks to the inflation outlook. There is still tremendous momentum when it comes to inflation right now. While inflation is likely to peak in the next few months, the overall pace will remain a challenge for consumers, businesses, and policy. However, hopefully, inflation will start to ease in the upcoming months.
- The Fed is indicating that the U.S. is on the cusp of an inflation reversal which would come as huge relief and offer investors something more positive to focus on. At the moment, risk perceptions are rising with each set of data that points to the need for substantially tighter monetary policy. Earnings are holding up for now, but then again, monetary tightening has not yet begun. It remains a tricky transition period for the US and the Fed to manage, highlighting why this afternoon’s inflation data is as important as it is.
- Ahead of today’s inflation print, the USD remains range-bound and consolidative, as if the upcoming data will offer investors the comfort they need to understand future inflation dynamics and the outlook for monetary policy. The reality is that a print of at least 7.2% has been priced in, with some forecasts slightly above that. The Fed has indicated that it will end its taper and start lifting rates in March and may even shrink its balance sheet before the end of the year. The point is that there is a lot priced in, and the inflation data would need to surprise quite significantly to the topside if the USD were to gain significantly on the back of this release. It is also important to understand the USD currently finds itself overvalued to the tune of some 15% on a trade-weighted, real-effective basis, implying that the risk in performance could still be to the downside.
Rand and International FX Commentary
- Today will be a busy day on the calendar, with several data scheduled for release and the President delivering his State of the Nation Address (SONA). Mining and manufacturing data will be of interest as they highlight the country’s potential to mine minerals whose prices have once again launched higher. At the same time, the SONA will offer an update on the political backdrop of the country. Whether these are market-moving or not is debatable, but for now, there is a lot of emphasis being placed on them, especially the SONA.
- And yet the ZAR has appreciated meaningfully through the past week despite the Fed confirming a more hawkish outlook and rate hike trajectory. Equity markets have rallied to unwind most of their recent losses, the VIX has dipped back down to highlight an improvement in risk appetite, and commodity prices are surging at a time when oil prices are stabilising. It implies that market conditions have moved in the ZAR’s favour and that SA’s terms of trade have recovered again. One possible stumbling block could be today’s US inflation data and the implications for the Fed. However, one should add that a lot of the anticipated rise in inflation has been priced in, and the inflation data would need to rise substantially above expectations to generate a strong market response that would support the USD.
- Ahead of the SONA, the USD-ZAR briefly traded below 15.2000. More positive talk of reforms could lay the foundation for the ZAR to appreciate a little further, especially if the dynamics highlighted above extend. That being said, the appreciation in the ZAR in recent trading sessions has had precious little to do with SA’s data or with the SONA.
- It remains the case that EM currencies are enjoying improved levels of global risk appetite and are responding to the solid earnings results released out of the US, which continue to justify high valuations. A more robust global growth outlook implies that commodity prices continue to enjoy solid support, and this combination will leave the ZAR resilient, despite all of SA’s deeper-seated structural problems. It’s over to the President and his SONA to remove one more major risk event before the focus starts to turn towards the budget more meaningfully.