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Local Market Commentary
- In an extensive interview with the Financial Times, President Hakainde Hichilema has vowed not to favour Chinese creditors in restructuring. About $6bn of Zambia’s debt is owed to Chinese creditors who help finance a spending splurge that ended in crisis under the previous administration. According to the President, “What we don’t intend to do is to cross-subsidize — one debt stockholder paying a higher price, if you want to put it that way, or having better terms and another having worse terms. One creditor being of Chinese origin or another origin is not much of the issue here. It’s to make sure we come out of the problem.” Note that the restructuring is seen as a test case for whether China will accept losses from a surge in loans to Africa over the past decade. Zambia is in the process of restructuring about $15bn of external debt in order to secure a $1.4bn IMF loan. Talks with creditors are due to take place in the coming weeks.
- The base metal complex had a terrible finish for the week with the likes of copper finishing 2.58% down on the day, nickel down 0.30% and lead down 2.08% for the session. All of negativity was driven by thoughts of the Fed taper and slowing Chinese demand as factory activity slowed in Jan as the resurgence of COVID-19 resulted in tough lockdowns hitting production.
- This morning we have a mild rebound in the price of copper with the benchmark 3m LME contract up by around 0.2% as we enter the start of the EU session. Investors are reminded that trade in the Asian session is going to be light for the next week as mainland China is out for the Lunar New Year holiday which starts today.
- In the local FX market, the Zambian Kwacha is expected to remain on the defensive this week amid a limited supply of hard currency.
- Moving over to the U.S., it will be a busy week in so far as data is concerned with the all-important labour market data scheduled. As always, the data is market moving and will be closely monitored by financial markets trying to gauge whether the current flattening in the US yield curve is indeed justified, or whether the economy is capable of withstanding the Fed’s tightening. In the background, oil prices are surging to keep inflation expectations buoyant and the Fed hawkish. How this all unfolds will likely have a significant impact on the stock markets which looks set to stage a recovery, after a fairly torrid week.
- Also of interest this week will be the unfolding negotiations with Russia. There are some indications that an agreement of sorts could be reached this week on a Russia sanctions bill, including actions that could impact on Russia even before any invasion took place. The West is ramping up its pressure on Russia making it abundantly clear that any invasion of Ukraine would hold significant economic consequences for Russia.
- After surging last week in the wake of the FOMC decision and guidance, the USD ran into some headwinds on Friday and appears to be retreating slightly this morning. The catalyst for the retreat appears to be some good earnings results, a positive close on Wall St on Friday and some good equity market performances this morning in Asia. The VIX has retreated sharply and risk aversion levels have subsided.
Rand and International FX Commentary
- As the USD surged last week, it gained ground against most currencies, including the ZAR. The USD-ZAR rose back up to levels seen early in Jan but still looks set to close the month off a little stronger than the 16.00 handle it was trading at when the year began. Of particular interest to traders, this week will be whether the USD is able to hold on to its gains or whether it will come in for a bout of profit-taking. Asian shares are generally in the green this morning, and this after Wall St finished strongly higher on Friday. Overall levels of risk aversion are collapsing alongside the VIX, which has pulled off its recent highs, and the ZAR holds the potential to recoup some of its losses this morning when liquidity returns.
- Domestically, the focus will all turn to some high profile legal and court developments. Former President Zuma will be back in court, doing everything in his power to avoid prosecution. However, his options are running out, and his trial could still begin this week. This will be of interest but unlikely to move markets much. Arguably more important for financial markets will be this week’s release of the second part of the Zondo commission’s reports. As with the first report, the second is likely to finger more wrongdoers and participants in state capture. Although this does not amount to prosecution, it is reputationally damaging, as recently seen with Bain. Whether the NPA can use this information and prosecute remains to be seen, but there is plenty of evidence and information to work with.
- Unrelated to the courts but extremely important ahead of the budget in Feb, Fin Min Godongwana’s brief to Parliament’s standing committee on finance on the R11bn World Bank Loan, whether it was warranted, and the terms of the loan will be. At face value, if the terms are favourable and it eases the pressure on the bond market due to lower levels of issuance, then the Fin Min will likely use that for his justification. All this takes place against a backdrop of fiscal data that is likely to show that the revenue numbers have remained resilient and may have even beaten expectations. This would allow Godongwana to present a much more favourable budget in Feb and help ease the pressure on SA financial markets.
- On balance, the market forces look a little more constructive for the ZAR and with major risk events now behind us, it will be more market-specific dynamics that drive the ZAR. These too, are looking more upbeat, and the ZAR is likely to try and make back some of the losses it sustained the previous week.