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Local Market Commentary
- Fuel supply hiccups have characterised Zambia’s fuel price increase on Friday as the country kick-started austerity measures under the IMF’s $1.4bn support economic reform programme. The increase is expected to result in manufacturers passing on the development to consumers in the form of price increases for foodstuffs in the margin of up to 15%, suggesting tough times loom ahead for Zambian’s especially as more austerity measures may be on the cards under the Hichilema administration.
- In the base metals complex, Low inventory levels have cushioned the blow for copper as investors shed risk as the Omicron virus weighs on global sentiment. The benchmark 3m LME copper contract is down just short of 0.5% at $9392.00/oz as we head into the start of the EU session and the risk is tilted to the downside in the near term.
- LME copper inventory levels have eased with the on-warrant LME registered stocks falling to 80500/tonnes, this has pushed the cash premium of copper over its three month measure to $30/tonne which is the highest level in two weeks.
- While the outlook for the U.S. economy remains upbeat, downside risks have intensified following the emergence of the Omicron variant. We have seen a number of forecasters downwardly revise their 2022 GDP forecasts citing risks and uncertainty surrounding the new Covid variant, persistent supply chain issues and a faster pace of policy tightening. That said, we caution investors from becoming overly concerned about the Omicron variant if the latest studies are anything to go by. The pace of GDP growth is expected to remain healthy in 2022 but is seen moderating from current levels. This expectation is expected to be reflected in the incoming U.S. leading indicator report.
- Later in the week, more U.S. data will be released that will likely dominate financial market direction. In focus will be the rate at which monetary policy could tighten in the U.S. More than the spread of Omicron and the anxiety that it is causing, investors are starting to look through those disruptions to the economic cycle more broadly as the arbiter of direction. For now, the U.S. economic cycle is strong, inflation high, and the Fed is being forced down the road of monetary tightening.
- Democrat Joe Manchin, the thorn in the side of the Biden administration desperately trying to push through the “build Back Stronger” spending initiative, indicated on Sunday that he would not support the spending package, earning him a strong rebuke from the White House. Without his support, the Democrats will not have enough votes to push this through Congress. Manchin is particularly concerned about the excessive size of the spending bill and its impact on inflation. Manchin has expressed his reservations over the need for such an enormous spending bill for some time now.
- In the FX markets, the final trading session of the week saw the Zambian Kwacha remain on the back foot, extending losses to a sixth straight session against the USD. The depreciation bias seen on the Kwacha this week is expected to remain this week amid higher importer appetite for hard currency. Meanwhile, after a depreciative USD bias characterised much of last week despite the more hawkish Fed, the USD was given a boost on Friday by Fed Governor Weller, whose comments once again emphasised U.S. monetary policy divergence to its major trading partners. As if by design, the Chinese central bank then announced a rate cut to further emphasise the widening disparity, which eventually found expression in the USD surging in Asian trade this morning. This has now raised questions around the outlook for the USD in the coming two weeks, given the correction that unfolded in global stock markets, the rise in risk aversion and the potential rotation to safety that may arise.
Rand and International FX Commentary
- As the year winds down, it seems fitting in a year of such uncertainty that the ZAR itself is trading schizophrenically. The past two weeks have been characterised by failed directional moves and a market that has moved largely sideways. Again this morning, traders and investors will be waking up to a ZAR that has depreciated sharply overnight after having appreciated strongly on Friday. This time, the catalyst for the move appears to have been the rally in the USD. After not responding particularly well to the Fed decision and statement, the USD suddenly woke up to the possibility that rate hikes could begin as early as March.
- On Friday, Fed Governor Chris Weller indicated that a rate hike would likely be warranted shortly after the bank ends its bond purchases in March. As a result, the USD is looking to break out of a bull flag formation to retest highs last seen in June 2020. That would catalyse further moves against emerging markets, but the signals are tentative, the volumes are thin, and the whipsaw action might make clear-cut decisions challenging through the remaining two weeks of the year.
- Although the bias for the USD is now to the topside, confirmation will only be given on a break above the prior high levels around 96.94 on the trade-weighted USD index. Domestically, there is nothing in the way of data, and news flow tends to slow dramatically through these next two weeks. If there is any direction to speak of, it will likely be driven by the USD, which means that factors affecting the US economy have suddenly become important.
- Internationally, direction appears to revolve around the timing of monetary tightening more than it does the spread of the Covid-19 variant Omicron. Once again, data from SA suggests that the variant may be more transmissible but has a much lower mortality rate. Whether that be due to the increased prevalence of vaccinations, natural immunity, or the fact that it is a weaker variant implies that this could blow itself out as quickly as it has arisen. Investors are, therefore, quite rightly looking through the current anxiety around Omicron and are focusing instead on the data. For the time being, the data has the ZAR on the defensive in a sharp reversal of Friday’s behaviour.