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Local Market Commentary
- We are in the final month of the 2021 work year and the government will be burning the midnight oil in an attempt to right an economy which is experiencing one of the worst debt hangovers globally. What is difficult for the current administration is that they need to cut expenditure and consumer subsidies at a time of surging living costs. One subsidy sticks out like a sore thumb and that is the fuel subsidies which cost government about $26 million on a monthly basis. President Hakainde Hichilema risks the ire of those that put him into power in August should he move ahead with any type of austerity which will undoubtedly be demanded by the IMF as part of a deal. It is not yet clear whether or not the fuel subsidies are a deal breaker for the IMF, but they have opposed them in the past.
- For historical reference one doesn’t need to look that far back in history to see what is needed. One need to just glance back a couple of years to the IMF bailout deal that was penned for Egypt. One the deal was inked there was massive economic hardship in the short term as subsidies were removed and support structures dismantled, however the country emerged quickly from these and became a shining light of investment opportunity for Africa in recent years.
- Keeping with the IMF, they have warned of economic collapse in some low-income countries unless creditors in the world’s richest nations suspend debt-service obligations and help renegotiate new terms. The IMF said that around 60% of the world’s poorest countries are at high risk or are already in debt distress, double the share in 2015. The international lender noted that with the G20’s debt-service suspension initiative expiring at the end of the year and interest rates poised to rise, low-income countries will find it increasingly difficult to service their debts. Lastly, the IMF said that we might see an economic collapse in some countries unless G20 creditors agree to accelerate debt restructurings and suspend debt service while the restructurings are being negotiated.
- Looking at the day ahead we have the local PMI reading on the cards. Internationally it’s a busy day, with the all important US Non-Farm payrolls on the cards.
- Taking a glance at the FX markets, strong data out of the US, with more to come today in the form of the payrolls data, should help support the USD at the margin. Due to the Fed’s more hawkish tilt on its monetary policy stance vs its major trading partners, the balance of support still rests with the USD. That being said, there is a lot of good news that’s already been priced in to the USD and a recovery in risk appetite may ironically trigger some rotation away from the USD to riskier destinations that might generate higher yields. The jury is out, and more dust needs to settle on the Omicron variant.
Rand and International FX Commentary
- Into the week’s final trading session, the recovery that began at the start of the week has consolidated. Interestingly, this came against the backdrop of a strong upsurge in infections which topped 11,000 per day and continues to rise. The epicentre appears to be Gauteng and will undoubtedly prove disruptive to business as many households isolate and take sick leave as they wait for the symptoms to pass. However, while infections are rising rapidly, the symptoms in this latest Omicron variant appear to be milder.
- Although it is early days, if the symptoms are milder, this may give the world something to cheer on instead of fear. Suppose the virus has mutated to a far less severe variant and is highly transmissible. In that case, it may very well wash through the global population far quicker and help build global levels of immunity that render Covid restrictions redundant as hospitalisations remain under control.
- Equity and other riskier markets have regained any lost ground, with some fresh records eyed before the end of the year. While politicians appear to have overreacted to a variant that may be a blessing in disguise, the financial markets appear well-positioned to take advantage. Lest we forget, there is still a tremendous amount of stimulus that still needs to wash through the global financial market system, and that will result in some impressive risk market performances.
- Although SA tourism has suffered a tremendous blow at the worst possible time, there may still be something to look forward to before the end of the year if this latest mutation signals the beginning of the end of the pandemic. Scientific analysis must confirm what many are anecdotally describing as a milder variant. That holds the potential to be a significant market driver through the coming weeks. Good news on this front holds the potential to drive a powerful risk rally that will capitalise on all the stimulus still unfolding in the background. This may reflect the reasons why the ZAR has stalled its depreciation and appears to be in a holding pattern until more information is received.
- Focus for the day will now turn to the US payrolls data. A strong reading may be good news for the USD but may, be even better news for risk markets that were sold-off recently if risk appetite rebounds heading into the weekend.