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Local Market Commentary
- Finance Minister Situmbeko Musokotwane yesterday sought approval from lawmakers for a ZMW 19.6bn supplementary budget for 2021. According to the Musokotwane, ZMW 12.5bn of that amount is for local currency bonds that the government issued to pay arrears to suppliers of fuel and the government’s farmer-input support program. Lawmakers will consider the proposal today. Note, the supplementary budget proposal is separate from additional spending plans of ZMW 19.3bn approved on December 16 last for items, including settling arrears and coronavirus vaccines.
- In the base metals complex, the 3m LME copper contract finished in the green yesterday as tight supply concerns countered any growing fears of the Omicron variant causing further economic disruptions due to increased restrictions. The red metal has consolidated yesterday’s gains this morning with the 3m contract holding at $9535.00/tonne as we enter the start of the EU session.
- Moving over to the US, the third reading of US GDP is expected to confirm the 2.1% rate of growth when compared to the prior three-month period. Given that we are now at the end of the fourth quarter, the data will unlikely attract too much attention, especially given the developments that we have seen over the last few weeks. Growth in Q4 is expected to be fairly robust, supported by higher consumer spending. The latest wave of COVID cases presents a downside risk, but it doesn’t seem to be having too much of an impact so far.
- Beyond just the third reading of GDP, which will not be particularly market moving, some focus will also shift to consumer confidence for Dec and existing home sales for Nov. Both are important drivers of economic activity in the U.S., and both will speak to the necessity for the Fed to normalise monetary policy. Consumer confidence is always an important feature of the U.S. economy, but as it strengthens alongside a strong improvement in the credit cycle, so there are consequences that could manifest in other imbalances across the economy, namely the current account deficit.
- The U.S. has always struggled with its twin deficits, and much of that is a function of the Fed’s influence in keeping monetary policy too loose for too long. The latest current account data released yesterday highlighted exactly this point when it showed that the current account deficit exploded to the widest it has been in fifteen years. Although that has clearly not affected the performance of the USD, which has benefited from a perceived monetary policy divergence to its trading partners and an overall rise in risk aversion, over time, it will weigh. It reminds us that turning complacent on the outlook for the USD based on its current performance is dangerous.
- The USD continues to consolidate ahead of the start of Christmas festivities, albeit at more buoyant levels. Directional momentum is not clear, and although it is tempting to trade off a long USD base, there could be some good news released on the ultimate impact of Omicron in the coming weeks, which will dial down overall levels of risk aversion. For now, position-taking is likely to be kept relatively contained, and the upcoming U.S. data will be looked at with interest rather than as market-moving events.
- Meanwhile, a broader bearish remains entrenched on the Zambian Kwacha at present as higher importer dollar demand continues to weigh.
Rand and International FX Commentary
- Yesterday, global stock markets were weaker. This morning they are stronger across the board. Central to why this whipsaw behaviour is unfolding is the assessment of the Omicron variant and the gradual realisation that it may not pose the threat that the ultra-conservative and pessimistic forecasting models had predicted. Scientists questioned by the BBC last night highlighted how the outcome was beginning to look more like it could beat even the best-case scenario, although to be fair, they still needed data which was still a week away.
- Nonetheless, it increasingly seems that countries implementing much harder lockdown restrictions may be overreacting with the sharp rise in infections not translating to an equal rise in hospitalisations. Fears that the healthcare systems would be overrun may not prove accurate because the Omicron variant does not generate severe illness. In many cases, people are not consulting doctors, let alone checking themselves into hospitals. Although South Africa’s demographics are quite different to those of Europe, there is still some optimism that can be taken from its experience. The main take-home point is not to panic and not to turn unnecessarily restrictive when the Omicron wave could blow over just as quickly as it began.
- Therefore, it is fair that stock markets have not priced in a more bearish outcome. The data seen thus far does not warrant it. Cautious optimism seems more justified, and that means that through the remaining two weeks of the year, global financial markets need not experience a calamitous period of increased volatility. On the contrary, once the dust settles on the Omicron wave, investors may well revert to focussing on the lagged effects of the colossal amounts of stimulus applied in the previous 18 months and to position around a world with stronger GDP growth, higher commodity prices and inflation and rising interest rates. That is not all positive for sure, but it is more economic and less political and will allow for a more normal functioning of markets.
- Against this backdrop, the ZAR is backing away from the week’s best levels, just as it did earlier in Dec. It is simply too soon to make a judgement call on what EMs will take direction from. On the one hand, the Omicron variant may mark a turning point in the pandemic in a positive way and lead to improved levels of risk appetite. On the other, that means that investors will also need to focus on tightening global liquidity levels as central banks worldwide respond to an inflation threat which could count firmly against emerging markets. Standing the ZAR in good stead is that it’s deeply undervalued, and one needs to question whether more extreme levels of undervaluation are indeed warranted. The prevailing environment leaves the ZAR in limbo, the USD is range-bound, and commodity prices are also trading in whipsaw fashion. Now is not the time to be holding any significant positions with a strong directional bias.