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Local Market Commentary
- President Hakainde Hichilema yesterday said that he was pleased China would co-chair a creditor committee during debt negotiations along with France and that a partial write-off of the country’s $32bn debt is being considered. The President added that Zambia aims to avoid another debt default and is seeking a reduction in debt as part of the relief package. According to the President, “we borrowed way too much. It is one of our priorities to restructure our debt.” Note that Finance Minister Situmbeko Musokotwane has said that Zambia’s debt talks should end in June, a timeline considered ambitious by many.
- Meanwhile, Zambia has agreed to end legal action against Vedanta Resources Ltd. Recall Vedanta’s Konkola Copper Mines was placed under provisional liquidation in 2019 after the previous Zambian government alleged that the company had lied about expansion plans and paid too little tax. KCM denied any wrongdoing. The ending of legal action marks another step by the Hichilema administration to repair damaged relationships with mining companies in the hope of attracting investment into the country.
- In the base metals market, copper took it on the chin yesterday registering losses of 1.9% on the day while aluminium fell even further recording losses of 3.11% to close the day at $2755.00/tonne. Nickel performed the worst shedding 6.5% to close at $28185.00/tonne. News of China tightening COVID-19 curbs in its two largest cities caused fears of a demand slump which drove the negative price action. Equally supportive of the demand fears was news that copper imports into China fell by 4% year on year to 465 330 tonnes, while factory activity contracted for a second straight month as shown by the PMI data at the end of April.
- This morning we have copper staging a recovery, up 1.15% on the day thus far at $9343.50/tonne and aluminium is up by 0.5%, nickel has yet to trade.
- It has been a tumultuous few weeks for risky assets as investors fled risk and sought safe havens due to worries about inflation and slower global economic growth. Investors have shifted their focus from alpha generation to capital preservation and are more concerned with raising cash, given the risk of a further deterioration in market conditions. Markets continue to re-price inflation risks while at the same time becoming more concerned about increasing recession risks.
- The sell-off in emerging market assets has been broad-based, with bonds, equities and currencies all taking a beating. Emerging market equities have suffered the most notable losses so far this year. The Ishares MSCI Emerging Markets ETF, which we use as a proxy for the performance of emerging market stocks, has lost almost 20% on a year-to-date basis, putting emerging market stocks at risk of being in a bear market.
- While still significant, the losses in emerging market bonds have been slightly less pronounced this year, with the JP Morgan Government Bond Index shedding 12.6% in 2022. The sell-off in emerging market bonds has primarily been a function of soaring inflation and the hawkish pivot from central banks as they look to rein in inflation expectations, which have surged to unprecedented levels amid the intensification of global supply-side price shocks. Bond curves across the world have bear flattened on the back of the aggressive rate hikes and hawkish forward guidance from central banks.
- The losses in emerging market currencies have been modest this year, notwithstanding the resurgent dollar and risk-off conditions. Specifically, the JP Morgan EM Currency Index has fallen by just over 2% on a year-to-date basis. That said, currencies with a high sensitivity to the war in Ukraine have been battered in recent weekly, with Central Eastern Europe currencies down almost 10%. African currencies sensitive to the situation in Ukraine have also been hit hard this year, with the likes of the Ghanaian Cedi and the Egyptian Pound leading the losses. The GHS and EGP have lost 18% and 15%, respectively, since the start of the year. The Zambian Kwacha has also recorded modest losses. On the other hand, the Nigerian Naira, Rwandan Franc, and Mozambican Metical have been relatively resilient this year, with all three currencies trading in the green against the USD in 2022.
Rand and International FX Commentary
- It’s difficult to make head or tail of the market at the moment. One would be justified in anticipating further ZAR depreciation due to the drop in stock markets and the rise in risk aversion while load shedding has resumed. Furthermore, the USD has remained strong, and commodity prices have slipped. Global investors are shifting towards a defensive positioning, and there are very few places to hide. Gold may be up on the trading session but is well off its highs. SA’s terms of trade have slipped, and the VIX’s rise is disturbing as it rises back towards distressed levels.
- And yet, the ZAR made a recovery off yesterday’s intra-day lows. While it looked to test levels towards 16.30 yesterday afternoon, it is trading back below 16.1200 this morning. The week’s main event will be the US inflation data scheduled for tomorrow and it might have the final say in how markets unfold. A stronger than expected reading could bolster the USD further, but investors have a lot priced in already, given how markets are currently performing.
- US Treasury yields are also off their highs, and with the 10yr positioned at over 3.0%, there is a lot of tightening priced into the market. The fact that the US yield curve is steepening again is interesting and suggests that the more the stock market corrects, the lower the probability that the Fed will be able to carry out the full extent of the tightening. This suggests that the USD is quite fully priced and no longer obvious rotation play.
- It is, therefore, a tricky time. While the face-value strategy would be to rotate further into the USD, there are many other factors to consider, and it is a relative game. Relative to how much has already been priced in, not just for the USD but also for other currencies. For the ZAR that means that the ZAR’s valuation relative to commodity prices should also be considered. For now, SA will still be producing trade and current account surpluses and the terms of trade, although off their highs, are still supportive of ZAR at the margin. Balance that off against domestic bond yields that have risen sharply, and the carry trade becomes a feature again. For all the concerns investors will have around the volatility in global equity markets, the ZAR may still have some resilience left in it yet.