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Local Market Commentary
- Zambia remains committed to fixing its debt problem with the current administration aiming for complete transparency following the massive ramp up in debt during the years of President Lungu. That said, there has not been a specific request made to Chinese creditors over Zambia’s debt restructuring plans according to China’s ambassador Li Jie who was meeting with Zambian Finance Minister Situmbeko Musokotwane which was streamed live on Facebook. China earlier in November stated that the start of negotiations with Zambia over the debt as essential but to date they are somewhat puzzled with no specific plan presented by Zambia to start the process. Li was quoted as saying – Zambia needs to submit or put forward plans “so that the Chinese counterparts could work together, sit together at the table” The Finance Minister was quoted by Bloomberg as saying “I don’t see this as a situation where it becomes impossible. This problem is solvable”
- The hawkish comments by the Fed Chairman Jerome Powell sent equities on a slippery slope in the North American session yesterday, however we have seen Asian shares bounce back this morning off annual lows but the Omicron risk is still firmly in focus. The chairman was quoted as saying that discussions will take place in December on whether or not to end bond purchases a bit earlier than had been anticipated. This as the economy performs strongly, however the concern is inflation which cannot accurately be characterized as “transitory,” is only expected to ease in the second half of 2022. It is currently running at more than twice the Fed’s flexible target of 2% annually
- Given all the talk about inflation one cannot ignore the developments in the energy markets. Oil’s plunge resumed yesterday, with both the Brent and WTI front-month benchmark contracts declining by over 5% on the session amid escalating concerns over the impact that new travel and other restrictions will have on oil demand. There has been a minor rebound this morning, but we still have Brent trading near $70 per barrel while WTI is near $67.65 per barrel, placing the market in a bear market as oil has lost more than 20% since peaking in October.
- The sell-off does, however, seem a little overdone at the moment. The impact on demand from the new restrictions should be fairly temporary, especially if we see that the new virus strain does produce milder symptoms than the likes of the delta strain. OPEC+ will also be meeting tomorrow and will most likely announce a pause to its output hikes. This will put a floor under prices in the near term and will be bullish over the next few months as demand recovers
- Moving over to base metals we see prices rebounding as fears surrounding the variant start to ease. Reuters reported the following yesterday which has been picked up by traders in Asia this morning – The EU drug regulator said on Tuesday it could approve vaccines adapted to target the Omicron variant of the coronavirus within three to four months if needed, but that existing shots would continue to provide protection. Speaking to the European Parliament, European Medicines Agency (EMA) executive director Emer Cooke said it was not known if drugmakers would need to tweak their vaccines to protect against Omicron, but the EMA was preparing for that possibility.
- In terms of the FX markets, notwithstanding some stronger US data recently and a more hawkish Fed, the USD is still off its recent highs and struggling to regain lost ground. It may be that investors simply got a bit ahead of themselves in how much they had priced in. If true, this will amount to nothing more than a short-term, healthy correction. It is difficult to see the USD losing significantly more ground while the disparity in monetary policies between the US and its major trading partners grows. Furthermore, the discovery of the Omicron variant has the potential to force investors back to safe havens of which the US remains one.
- The ZMW remains topside focused and as mentioned before there is a strong chance that we could breach the 18.00 mark before the close of 2020 once again.
Rand and International FX Commentary
- It is strange to see the USD coming under some pressure after the central bank sounds a more hawkish tone. One can only interpret that as a sign that too much hawkishness had been priced in and that investors are now comfortable locking in some profits. As a result, the EUR made back some ground vs the USD, as did the JPY, while the GBP stopped its plunge. The ZAR, in turn, appears to be capitalising, but its timing is strange, and one can only treat this as a recovery from an overstretched position.
- After all, the news released yesterday was, in aggregate, a little disappointing. The unemployment rate continued to surge to a fresh record high of 34.9%, signalling a drop in employment to lockdown levels. It implies that some 2mn jobs have been lost through the pandemic, which amounts to an approximate decline of 12%. It is against this backdrop that the latest travel bans are particularly jarring. The tourism industry would be able to soak up many of those unemployed and alleviate pressure on some of the downstream industries that rely on tourism activity.
- The tourism stats were themselves appalling and highlighted an industry in crisis, while at the same time, the trade surplus narrowed to its narrowest level this year of R19.78bn from R22.15bn previously. It goes to highlight just how precarious SA’s improvement is. A slight correction in commodity prices as logistical supply chain pressures ease, and a dip in demand due to travel restrictions and fresh lockdowns and commodity prices might have further to correct and detract from the enormous surplus produced.
- Finally, the government finance stats showed slippage from their narrower budget deficit positions, something that will be exaggerated should commodity prices continue to correct as they are at the moment. Again, the impact from the travel ban will not help, and yet another piece of data is released that is not particularly supportive of the ZAR. THEREFORE, the ZAR’s recovery might be nothing more than a transitory phase that constitutes a healthy correction and should be treated as such. Exporters will still be enjoying constructive levels.