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Local Market Commentary
- On Saturday, Zambia’s Industrial Development Corp (IDC) announced a cancellation of a request for expression of interest from consultants for financial and operational restructuring of Zesco Ltd. Note the IDC had announced on January 4 that it was seeking consultants to Zesco a financially viable and investment-grade utility over the medium term. Zesco plans to restructure all of the $3.5bn its owes creditors. The debt includes nearly $1.2 billion of arrears the utility owes to privately-owned power producers that supply the company electricity. Some of Zesco’s biggest creditors also include the Industrial & Commercial Bank of China Ltd., the Export-Import Bank of China, and the Development Bank of Southern Africa.
- Stateside, two key events will take place this week. The first will be the nomination process of the Senate Banking Committee to re-instate Fed Chairman Powell for another term in office and introduce Lael Brainard as the Vice-Chair. Both will be asked about their monetary policy views, and both will likely stick to the Fed’s communication line. Fed Chairman Powell will be the first to face the committee on the 11th, followed by Brainard on the 13th. The Fed’s more hawkish stance of a faster taper and the prospect of balance sheet reduction during a phase of rate hikes will likely sit uncomfortably with some members of the Senate, especially on the Democrat side as they seek to reflate the economy.
- Inflation, however, is a major concern, and the justification that both Powell and Brainard will use to explain why tightening monetary policy is in the U.S. economy’s interests. Should the data this week disappoint to the topside, financial markets could experience more volatility. It is where the risk lies at the moment and what most markets worldwide will be focused on. Tighter U.S. monetary policy and a rise in risk aversion will favour the USD, especially against emerging markets.
- The wholesale inventories and sales report will provide the market with insights into the level of goods acquired for the purpose of resale without further processing. It uses monthly survey data and is helpful in that it helps investors gauge supply and demand dynamics in the retail sector. The initial November print showed inventories fell sharply through the month, suggesting retail activity was picking up amid solid demand as the U.S. economy continues to grow from strength to strength. Should this be confirmed in the final print, it will add to other data pointing to a strong economic expansion in the States, supported by pent-up demand and extreme fiscal and monetary stimulus.
- In the FX markets, following last week’s disappointment concerning the softer than expected non-farm payrolls data, the USD is finding some traction this morning as investors position for the Fed nomination testimonies and the U.S. inflation data scheduled for release. Expectations of tighter monetary policy will be reinforced, and this will likely prevent the USD from coming under any further pressure through the week ahead.
- Meanwhile, the Zambian Kwacha is expected to remain on the defensive this week as the market awaits a full pick up in corporate activity such as exports after the holiday season. A tight supply of dollars will likely continue weigh on the local unit.
Rand and International FX Commentary
- A mixed non-farm payrolls report dented the performance of the USD last week to help it end on the defensive. This week, the focus will remain on the USD’s performance and the upcoming US inflation data. A higher-than-expected reading will raise the prospect of more aggressive monetary tightening by the Fed and could help the USD recover off its lows. The opposite also holds true, but the risk is deemed to be firmly to the topside for the time being.
- US Fed Chairman Powell and Lael Brainard will also face the Senate Banking Committee this week, where they will make their case for appointment to the positions of Chair and Vice-chair, respectively. They will likely stick to the Fed’s more hawkish communication as indicated in the Fed’s minutes, which, together with the risk of a strong inflation reading, will likely lend the USD some support at the start of the week.
- Domestically, there is not much in the way of significant market-moving data to look forward to with only vehicle sales and manufacturing scheduled for release. Both offer insight into the productive sectors of the SA economy, but neither one will bother either the ZAR or the fixed income markets much. Therefore, the ZAR will be given direction from offshore developments that might affect Fed policy and overall levels of risk appetite. The latter is also sensitive to developments on the Covid-19 front, although there does appear to be a softening on Omicron risk assessments.
- That being said, Cyprus has discovered a new variant that appears to be a blend of Omicron and Delta, although thus far, there seems to be no reason to panic and financial markets in Asia this morning have not responded with much conviction. New variants will be a feature of the future and the global population will need to live with that. Given the high degree of natural immunity combined with vaccinations, there is a high probability that this will not prolong the current wave or start a new one.