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Stock levels remain supportive of copper prices

January 17, 2022by Nicholas Kabaso
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Local Market Commentary

  • The Zambian government has extended an import waiver on petroleum products by six months to June 30, in line with Statutory Instrument number 3 of 2022. Under this SI, the customs duty rate for petrol, diesel, kerosene, and liquefied petroleum gas has been zero-rated. While the move by the government shows that it is trying to ease the burden on consumers and retails, the tax waiver will result in a significant loss in government revenue.
  • In the base metals complex, copper prices have recovered marginally this morning following the losses recorded on Friday. The benchmark 3m LME contract finished 2.43% down on the session to close at $9719.50/tonne on Friday and is currently marking time just shy of $9730.00/tonne as the EU open beckons this morning.
  • Investors are keeping a close eye out on stock levels which remain one of the key supporting factors to the copper market. On-warrant LME copper inventories are at 78 375 which is some 67% lower than the August highs. Stocks in warehouses monitored by the Shanghai Futures Exchange are hovering at levels close to the 2009 lows at 30 330 tonnes according to Reuters.
  • Shifting to the FX markets, the broader bearish bias seen on the Zambian Kwacha last week is expected to persist this week due to reawakening dollar demand from companies across all sectors as they return from the traditional festivity break.
  • Moving over to the U.S., it will be a quiet start to the trading week as the U.S. enjoys a long weekend for the Martin Luther King Day celebrations. Nothing much to read into this, but the return to full trading will mark more normalised trading levels for the year ahead. Investors will be a little uncertain of direction given the behaviour of the USD and stock markets last week and the need to let the dust settle as the world grinds its way through the Omicron wave and comes to terms with living with Covid.
  • And there is no doubt that Omicron is inflicting another blow on small businesses in the U.S. It is not just the disruptions of staff members getting sick and isolating but also the logistical constraints that are resulting in delays in the supply chain, hampering production and sales. U.S. retail sales, for instance, fell 1.9% in Dec amid a shortage of goods and people turning cautious of shopping due to the prevalence of Covid-19. Furthermore, the rise in inflation has rendered many goods more expensive and dissuaded buyers.
  • Looking at the week ahead, earnings are set to test the valuations of growth stocks after a rocky start to the year. Strong earnings are required to keep the trajectory of stocks heading higher. Recent earnings releases have beaten expectations to the topside and raised expectations a little higher. Whether that will continue is now debatable and will likely determine how well Wall St and other risk markets perform through the week.
  • The USD bounced on Friday as investors checked the recent sell-off and questioned whether it was indeed justified given the more hawkish stance that the Fed is about to announce later this month. Trading the USD weaker only on the premise that too much had been priced in holds its own sets of risks and investors will want to proceed a little more cautiously, given the USD sell-off that unfolded last week. Trading today will be a touch more consolidative given the public holiday in the US.

Rand and International FX Commentary

  • It will be an interesting week ahead that will start off on a lull as the US enjoys a public holiday for Martin Luther King Day. Nevertheless, the interest was generated upfront with the release of the latest Chinese GDP data, which showed that the economy expanded 8.1% in 2021 vs a year ago. The 4th quarter growth of 4.0% y/y was well above market expectations pencilled in by analysts polled by Reuters that had anticipated growth of 3.6% y/y. The result means that for all of China’s troubles through 2021, it still grew very impressively, which may offer some perspective on why commodity prices have held up as well as they have. The news should be positive for equity markets at the margin, although there has been a mixed bag across Asia this morning.
  • Domestically, it will be an interesting week with CPI and the ANC’s internal factional battle for leadership intensifying. On the former, inflation is set to creep ever closer to the upper limit of the 3-6% inflation target band and is now comfortably above the target’s midpoint. This is enough to prompt the SARB to do more and will likely strengthen the argument for further monetary tightening throughout most of the year. In a world where developed market central banks are also tightening, this would’ve been necessary if ZAR stability was a priority at all.
  • However, arguably just as important will be the ANC’s internal factional battle ahead of its internal leadership race in December of this year. Battle lines are being drawn, and it is clear that Lindiwe Sisulu is going to run for the presidency. She is doing so by backing a faction opposed to Ramaphosa, knowing full well that she stands no chance of usurping him by supporting his faction. It may be a bold move on her part, but Ramaphosa is being forced to respond to comments Sisulu made about the constitution while also forcing him to take action against her directly. Doing so will factionalise the ANC even more, and as much as possible, Ramaphosa will want the ANC’s internal structures to deal with her.
  • In ending, it is unclear whether the ZAR will enjoy as strong a week as the one just passed. Technical indicators are alluding to some loss in momentum, and although that can change quickly, it has performed much better in the past two months and may be ripe for a breather. Investors will likely start the week cautiously with all that is unfolding.

Nicholas Kabaso

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