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Local Market Commentary
- As usual, at the start of each month, the Purchasing Mangers’ indices (PMI) from across Sub-Saharan Africa will be in focus today. Recall in February regional PMI data showed that Omicron weighed on regional growth in the first month of 2021 as a number of social distancing measures remained in place in January to curb the spread of the new fast-spreading variant. Specifically, the Sub Saharan Africa average PMI score fell from 52.1 in December to 51.4 in January. While the gauge edged lower last month, it is encouraging to note that it remains buoyed above the 50.0 point mark, pointing to an expansion in economic activity.
- While economic growth in the region slowed in January, we expect an improvement in economic conditions in February following the lifting of social distancing measures against the backdrop of a sustained rally in international commodity prices. That said, there are still a number of downside risks to the regional inflation outlook, including persistent supply chain challenges, soaring prices and the emergence of new strains of the coronavirus.
- Data from the USTR 2021 Annual Report showed that U.S imports under the duty-free African Growth & Opportunity Act climbed to $6.7bn in 2021 from $4.2bn a year earlier. Oil shipments more than doubled to $1.9bn in 2021, compared with $707.3mn in 2020, whole non-oil trade increased by 41% to $4.8bn last year. South Africa was the biggest exporter, followed by Nigeria, Kenya, Ghana and Angola. Note that this year 36 sub-Saharan African countries are eligible for AGOA this year after the U.S. terminated benefits for Ethiopia, Guinea and Mali.
- In the base metals complex, Copper has received a leg up clearing the $10000/tonne level yesterday, the red metal has continued to build on these gains today clearing the Feb 2022 highs. The benchmark 3m LME contract is currently trading at $10345/tonne with the Oct 2021 highs of $10452.50/tonne.
- After recording its best annual performance since 2005 last year on the back of improved FX reserve levels, buoyant copper prices, and optimism over the August election victory of Hakainde Hichilema, the ZMW has come under notable selling pressure at the start of 2022. The ZMW has not only underperformed its Southern African peers but is currently the second-worst performing African currency against the USD so far this year.
- Much of the ZMW weakness can be attributed to tight FX liquidity conditions. Demand for hard currency from importers and corporates on the back of improving economic activity has outpaced available supply and thus weighed on the currency. It is worth noting that the ZMW rally was in part driven by sentiment and that economic fundamentals remain the same at present. The REER has therefore trended back below its long-run mean. Looking ahead, the bullish copper outlook notwithstanding, further room for appreciation will likely depend on the new government making significant headway in implementing the required economic reforms and addressing the existing structural challenges.
- In the U.S., the main news overnight was Fed Chairman Powell’s comments on the outlook for interest rates. He indicated that the Fed would only lift rates “gradually”, signalling that he would support a 25bp increase in March. Not only did he send a message that a 50bp rise would be a step too far, but that the Fed was concerned about growth amid the ongoing war in Ukraine that he described as a “game-changer”. The impact on the stock market has been immediate as it surged on the news to help lower overall levels of risk aversion. The USD as yet has not retreated much on the news.
- The USD continues to attract a safe-haven bid for the time being, but should any of the news flow out of Ukraine improve, it may well retreat and retreat sharply. It has struggled to gain much ground despite all the risk aversion currently in the market. The Fed’s softer stance on interest rates will likely mean that it will become vulnerable to a sell-off should risk appetite improve once more. For now, all eyes on the Ukrainian war with Russia and what the ultimate consequences of the war will be for financial markets.
Rand and International FX Commentary
- Another day of whipsaw financial market price action yesterday with markets responding to Federal Reserve Chairman Powell’s comments, indicating that the central bank would begin to “carefully” raise interest rates. Powell poured cold water on any expectations of a more aggressive stance by the Fed and termed the current Russian war with Ukraine a game-changer. In his comments, Powell highlighted the difficulties central banks will have in deciding on interest rates when uncomfortably high inflation is juxtaposed with the adverse growth event of the war. Powell inadvertently signalled that central banks will more than likely default to protecting the economy above prioritising GDP growth.
- The effect of his comment was powerful and immediate, with Wall St rallying hard on the news. Analysis of stock market performances post previous wars shows that stock markets often perform surprisingly well after the onset of war. This is less about conspiratorial views on arms manufacturing and more about the supportive policies that the authorities implement to help offset the effects of uncertainty and the drag on growth that war can often impose. This time might be similar, the recent drops in stock markets notwithstanding.
- The significance of the ZAR is that it boosts the attraction of emerging markets by reducing overall levels of risk aversion. The ZAR displayed this reaction overnight by recovering strongly off the week’s worst levels, trading close to 15.3000 overnight. It is back within the well-word range that the ZAR has traded in throughout most of the war, highlighting a high degree of resilience that the ZAR has enjoyed.
- One of the key reasons has been the ZAR’s link to commodity prices and the realisation that SA may be one of the few countries that might benefit from the war for several reasons. The first is that coal is suddenly being looked at as an alternative to oil. Coal prices have skyrocketed at an even more rapid rate than oil and, in the process, boosted SA’s terms of trade. The second is palladium and the fact that SA’s PGM mining sector could benefit from increased exports, especially if there is any substitution with platinum. The third is that the emerging market investible universe has shrunk. While that also holds for other emerging markets, especially in LATAM, SA’s yields are attractive enough, especially in the context of higher commodity prices to attract foreign capital. In short, the ZAR is well poised to continue reflecting high degrees of resilience, the rise in geopolitical uncertainty and risk notwithstanding.