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Local Market Commentary
- Ratings agency Fitch in a report, has said that the sector outlook for African banks next year is neutral, with uncertain business conditions and Covid-19 risk constraining recovery. Fitch added that they anticipate a slightly faster rise in lending, with most economies growing at the trend rate and banks gradually loosening stricter/pandemic-era underwriting standards. Fitch’s base case also considers risks to global growth, relatively high commodity prices, and still favourable external financing conditions. Fitch also noted that the pace of downgrades has significantly reduced this year compared to the prior year, and barring any significant downside risks, these trends are expected to persist in 2022.
- Copper finished yesterday’s session in the red, and the trend has extended into today’s Asian session, with the red metal currently marking time around the $9435.00/tonne mark as we head into the EU open. Tactical investors are concerned that the increase in the timing of the Fed taper could derail some of the economic dynamism seen of late, equally Omicron concerns are still doing the rounds with mainland China detecting its first case of the variant in the port city of Tianjin.
- In terms of supply dynamics, there has been a significant improvement in the on-warrant LME inventory levels. These have risen to 80 350 tonnes, the highest in almost two months. This has seen the copper curve move back into contango with the cash price of copper flipping to a discount of $12.50/tonne, the first time this has been the case since 17th Sep this year.
- Inflation in the U.S. is a problem, and the belief that the impact is transitory is being questioned more each day. Fed Chairman Powell has alluded to the need to accelerate the taper and talk of hiking interest rates. This context makes the upcoming FOMC meeting so interesting and important. It will determine how expectations for the next year are shaped and the ultimate impact on the financial market. It is the week’s main event, and anything that speaks to the Fed’s decision making will hold interest. Today’s PPI data is a case in point.
- Prices paid by U.S. producers accelerated in October, largely due to higher goods costs, which has fuelled concerns about the persistence of inflationary pressures in the economy. The Producer Price Index for final demand increased 0.6% in October on a m/m basis, as prices for final demand goods rose 1.2% and the index for final demand services moved up 0.2%. The final demand index rose 8.6% from a year earlier. This annual advance was the largest since figures back in 2010. However, the November reading is expected to have surpassed this, with consensus expecting price increases of over 9%. We have, however, recently seen oil prices and those for some other raw materials decline, suggesting that upward price pressures could be alleviated to some degree in the coming months.
- Finally, it is also worth noting the discussions that have taken place between President Biden and Democrat moderate Manchin. Biden has scaled back his massively ambitious $3.5trln spending package on social security and green energy to $1.75trln, but it seems that it still makes Manchin uncomfortable. Key is how this will be financed and whether the spending programme can be fiscally neutral. Although the talks were described as constructive, Manchin was reportedly still noncommittal on whether he would back such an initiative and allow the Democrats to use their simple majority to pass the bill through Congress. At the margin, this would be another positive for the Fed to consider.
- Shifting to the the FX markets, the trade-weighted USD is flirting with a key technical trend line, which, if broken to the topside, could open the door for further gains. It is not surprising given the upcoming FOMC meeting where the Fed may very well persist with its more hawkish stance as it seeks to control inflation. To gain perspective on how the USD might respond, the Fed’s behaviour needs to be considered against the ECB, which later this week will be faced with a very different prospect. The E.U. economy is in the middle of a soft patch, and while the Fed may seek to accelerate tapering, the ECB might look to stall on removing stimulus. Therefore, it is not surprising that the EUR looks vulnerable to more selling, while the USD holds the potential to extend its gains a little further.
- Meanwhile, the Zambian Kwacha remained on the defensive at the start of the week, extending losses to a second straight session and broadly underperformed most African currencies tracked by Bloomberg. Pulling back the lens, it is worth noting that it remains Africa’s best-performing currency on a year-to-date basis, up by around 30% against the USD. The ZMW rally has been driven by improved sentiment and elevated copper prices, the country’s main export. Going forward, further room for appreciation will likely depend on the new government making significant headway in implementing the required economic reforms and addressing the existing structural challenges.
Rand and International FX Commentary
- Ahead of the FOMC decision and statement tomorrow, the market is trading with some apprehension. On the one hand, investors are pricing in a Fed that will want to respond to the highest inflation numbers in forty years, a labour market that is tightening rapidly and a strong economic recovery. On the other, the threat of Omicron will have people concerned that the global economy could be in for another bumpy patch where growth is negatively affected. On aggregate, investors are trading as though the Fed will look straight through the fourth wave and focus on the economic data that remains strong and the inflation episode that is a threat.
- Equity markets this morning have corrected lower, and the VIX (fear factor index) has risen off yesterday’s lows. Emerging market currencies are reflecting some vulnerability to depreciation, and the ZAR this morning is no different as it trades on the defensive. It is telling that the ZAR has been unable to sustain any recovery for the second day in succession. It is trading like a currency waiting for some bad news to trade on and shows the potential to depreciate further, especially if the Fed persists with a more hawkish tone and offers the USD further support.
- One bit of good news in the press this morning are indications that the UK may look to remove SA off its red list as the worldwide spread of Omicron means that these bans are pointless. The travel bans could be scrapped as early as this week and replaced with requirements to be double vaccinated with a negative PCR test. It is unclear whether it also comes attached to a quarantine stay, but it is encouraging that these foreign countries are coming to their senses. However, the damage to the tourism industry is complete, and SA’s recovery to pre-Covid economic activity levels may now need to wait until deep into 2022 or longer.
- Over the next two days, there will be plenty of SA data to mull over, and not much of it will make for pretty reading. If anything, it will result in investors pricing in a flatter trajectory of rate hikes. Growth in SA has been badly affected by the Omicron discovery. Tourism on its own lost an estimated R1.0bn in sales, while the supply chains feeding the sector have also sustained damage. As it is, the SARB came in for criticism by hiking while unemployment is as high as it is. For the SARB to retain broad-based support, it will need to show some sensitivity to the state of the economy, even if that means tolerating slightly higher levels of inflation. That being said, inflation in SA remains firmly under control, so the ultimate effect on ZAR might be to keep it on the defensive as investors price in slightly lower yield attraction.