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Local Market Commentary
- As usual at the start of each month, the Purchasing Managers’ Indices (PMI) from across the globe will be in focus this week. The flash PMI data for the Southern African region is expected to further reflect the negative impact the omicron coronavirus wave had on the services sector. Note most travel restrictions against countries in the region were still in place in January. That said, with most of the travel restrictions having been lifted at the end of January and economies in the region re-opening, demand may start to pick up and aid economic recovery prospects going forward. As such, we may PMI indices rise in the near-term.
- In base metal complex, copper prices have edged higher this morning building on yesterday’s strong gains as traders remain concerned about low inventory levels and rumblings of mine nationalisation out of Chile.
- In the local FX market, the bearish bias on the Zambia Kwacha has persisted at the start of the month as demand for hard currency remains higher than actual inflows. Losses on the local unit yesterday saw it close at more than a 5-month low, just shy of 18.200, according to Bloomberg data.
- Over in the U.S., ADP data released yesterday afternoon missed expectations by quite some margin. Compared with expectations of a gain of 200k, the ADP data reflected a loss of 300k jobs. The Omicron variant was blamed for the disruption to economic activity as mobility stats show that the global economy recorded a significant hit. Today, the focus will turn to the weekly jobless claims data for another very current release that will offer perspective on whether the impact has been sustained or not. All this will build expectations ahead of tomorrow’s all-important non-farm payrolls data.
- For the fourth day in succession, Wall St has notched up solid gains unwinding much of the losses seen through Jan. Although not out of the woods yet, the market’s recovery from its lows suggests that investors are not yet ready to accept a massive correction lower. Recent earnings data that has beaten expectations to the topside justify current valuations. One eye will be kept on the data, and the other on geopolitical developments in Ukraine, where the U.S. is deploying nearly 3,000 troops to combat Russia’s military build-up.
- The USD remained on the defensive yesterday and recorded its third consecutive day of losses. The USD index is now trading at levels seen just ahead of the FOMC decision and statement last week, with the recent ADP data shocking the market into the reality that the U.S. economy is not out of the woods just yet. The weak ADP data has also given rise to speculation that the non-farm payrolls data could equally be weak and that the U.S. economy still has further to improve before it can fully justify the Fed’s hawkish stance. For now, the impact is deemed to be temporary.
Rand and International FX Commentary
- Notwithstanding another positive day on Wall St, the ZAR still lost some ground towards the end of the trading session as investors prepared for the combination of labour market data out of the US and the ECB’s decisions and the BoE today. These are market-moving developments, and given the magnitude of appreciation seen recently, there was bound to be some profit-taking or consolidation.
- A case in point was the private sector ADP payrolls data yesterday, which reflected a drop of 301k in Jan due to the government reaction to Omicron and the fearmongering that once again affected mobility and economic activity. Ahead of the key non-farm payrolls data later, this is an important release as it suggests that the official stats may have also been significantly affected. Given the hawkish expectations priced in, any indications of a softer economy that may help limit the inflation pass-through could impact equity, bond and FX markets.
- But today, the focus will turn to the guidance given by the ECB and the BoE. While the latter is expected to lift rates by a further 25bp in its second consecutive rate hike, the former is expected to play it cool and remain ultra-supportive as it seeks to promote GDP growth. These outcomes are priced in, but what is less known is the guidance and communication they will offer.
- Domestically, one factor that may detract from the performance of the ZAR is the news that Denel has missed some bond payments and is in talks with the government for assistance. It once again highlights the plight of SA’s SOEs and how depleted and vulnerable they’ve become. It also reflects the risk to SA’s fiscus and highlights one of the key detractors of economic growth. Although this will constitute another bailout and a small one that is unlikely to disrupt the fiscus too much, it is a signal that the Covid recovery is still in its infancy and that there are still many risks that SA needs to tackle, through deep-seated reforms.