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Local Market Commentary
- Keeping abreast with Agricultural developments in Zambia, Minister of Agriculture Reuben Mtolo has indicated that the government owes ZMW 1.6bn to farmers who supplied maize to the Food Reserve Agency during this year’s crop marketing season. Mtolo added that the government plans to sell some of the maize purchased by the agency to raise money to offset payments owed to farmers. According to Mtolo, the previous administration had only planned to purchase 500,000 metric tons, but the new regime extended the purchase by 400,000 metric tons as there was maize still being held by farmers. The extra amount was not budgeted, so the government now owes ZMW 1.6bn to farmers countrywide.
- Regionally, the focal point was on the news that the UK would be scrapping the red list as its government comes to terms with the Omicron COVID-19 variant. The announcement came late yesterday afternoon with UK health Secretary Sajid Javid telling the UK parliament the following – “Now that there is community transmission of Omicron in the UK and Omicron has spread so widely across the world, the travel red list is now less effective in slowing the incursion of Omicron from abroad,” he said. The UK has come under serious fire for its treatment of Botswana and South Africa who identified the variant and announced it to the world only to be shunned for doing so. The fact of the matter is this type of reaction from the developed world will only encourage governments to be less than forthcoming in the future to protect their economies and markets from isolation. The damage to the Christmas tourism revenue is already baked in and one only hopes that the rest of the summer can be salvaged.
- Copper finished yesterday’s session in the red shedding close to 0.4% to finish the trading session at $9412.00/tonne. There has been a mild pick up this morning in the Asian session but by in large investors are sidelined ahead of the FOMC meeting later this evening. The fear is that a more aggressive stance on monetary policy will reduce the dollar liquidity in the market and thus slow the momentum of economic recovery in the world’s largest economy and by extension many others.
- Meanwhile, Reuters reported the following – Miner BHP Group has completed a $30 million blockchain trade in copper concentrate with China Minmetals Corp, online platform MineHub said on Tuesday. The pilot transaction was the first cross-border shipment for copper concentrates using blockchain, MineHub said in a statement. “We’re planning another trial with an expanded scope in early 2022,” BHP Chief Commercial Officer Vandita Pant said in an article on BHP’s website.
- Moving over to the US, hawks will be on the edge of their seats as they wait to see if the FOMC follows through with its recent communication and accelerates the pace of its taper and normalising policy. The labour market is steadily tightening, and inflation pressures in the U.S. remain acute, as reflected in yesterday’s PPI data. Recent guidance from Fed Chairman Powell alluded to the FOMC accelerating the pace of the taper, while the dot plots in this latest edition will likely show that members brought forward the timing of a hike and raised the number before the end of 2022. The first, rate hike is now expected midway through 2022. As a result, the monetary policy differential between the U.S. and other major developed markets will widen in the quarters ahead. This should continue to support the USD, although much of this is already priced in.
- It is against this backdrop that yesterday’s PPI data was important. Producer inflation rose 9.6% y/y, which was the highest reading since the data was restated eleven years ago. It also highlights how the surge in inflation could become more entrenched. Although PPI data historically has not been market moving, this time around, it highlights just how acute a problem, inflation has become.
- Concerning data, retail sales will hold interest. While Covid related growth concerns have resurfaced, the recovery in the U.S. retail sector remains healthy. Retail sales rose for a third consecutive month in October, with sales up 1.7% m/m. This marked the strongest pace of growth since March, as favourable lending conditions and stimulus measures continued to underpin consumer spending. Going forward, while the Fed has begun tightening monetary policy, the outlook for the sector remains rosy, with growth in the sector expected to remain healthy in 2022 as the economy continues to strengthen.
- Yesterday was a stronger day for the USD as it eked out more gains against the majors, but especially against emerging markets. Today, all eyes will be on the FOMC statement and the guidance the Fed offers on future tapering and rate hikes. There is no question that the Fed needs to respond to what is becoming a very uncomfortable inflation episode or risk losing its credibility. How strongly will determine how powerfully the USD will respond and whether it will end the year with a surge. Emerging market currencies on the flip side will be concerned that the benign global risk environment will become less supportive.
Rand and International FX Commentary
- Today is an important day. The US Federal Reserve will announce the outcome of its FOMC deliberations and how it plans to proceed. Given the strength of the economic recovery in the US and the stubbornly high level of inflation, the Fed is expected to announce an acceleration to the taper and how it plans to transition towards a more normalised monetary policy where a rate hike is possible before the end of next year. Individual member forecasts of the Fed funds rate will likely show that they have brought forward and raised their expectations concerning interest rates. At the same time, Fed Chairman Powell could even drop reference to the word temporary when describing inflation.
- Although the Fed will be mindful of the impact its guidance will have on the market, it will also want to communicate that it sees the US economy as strong enough and resilient enough to warrant monetary policy normalisation. It will want to frame the outcome as a sign that the economy is doing well and there is nothing to fear. While that may be true for the Fed and the US economy, it also implies that the market can no longer rely on the Fed in the future to absorb much of the US government’s bond issuance.
- As the market is forced to absorb more DM issuance, it leaves less capacity to absorb higher risk or volatile emerging market debt unless priced more attractively. This crowding out of emerging markets caused periods of dislocation in the past as investors readjust to this new reality. One should not write off the possibility of this happening again, regardless of how much has been “priced in” ahead of time. The difference between pricing in an event and this change to US monetary policy, is that an event may be a once-off. This, on the other hand, reflects a fundamental shift in the way that the market functions and affects the flow of funds more broadly. It is not so much that investors might pick on South Africa, as much as it may trigger a shift against emerging markets more broadly.
- All this happens against a rapidly spreading Covid-19 Omicron variant. While South Africans can lament the overreaction of western governments and the heavy-handed response to a variant that has so far made no perceptible impact on the mortality rate, it has caused some concern in global markets. It has negatively affected risk appetite at the margin, and the ZAR’s recent trading behaviour reflects that. While it is always difficult to predict how a market may respond in the immediate aftermath of an announcement, the tide does appear to be turning. Investors would do well to prepare themselves for a less benign, less EM currency supportive environment in the future.