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Local Market Commentary
- News vendors are focused strongly on how the world reacts to the new Omicron COVID-19 variant. Cross border travel is going to become almost impossible and tourism is undoubtedly going to take a massive blow as a result of countries across the globe shutting their borders.
- The question that we have been asked is whether or not the Omicron variant has the ability to unseat the economic recovery and thus place base metals on the backfoot as we exit 2021. The answer to that is it is all dependent on how the authorities behave and how quick the scientists give a definitive answer as to its mortality. For countries where the vaccination rates are high, the morality figures are likely to be low, the virus may be more transmissible but those that have been previously vaccinated are likely to experience mild symptoms.
- In the near term broader question is how the lockdowns will affect supply chains and logistics. Logistics chains are already stretched and this adds another level of complexity to an already impossible environment. This is likely to make price action volatile as investors assess the impact on both the supply leg as well as demand as ports battle to clear the backlog.
- Longer term we remain base metal bulls with the decarbonisation and infrastructure spending projects underpinning demand. These are broader macro and structural factors which are baked in given their legal legitimacy.
- This sets the tone for the launch of Zambian Airways on the 1st December. Timing of the launch could not have been worse as travellers will look to postpone any non-essential travel as the new variant remains an unknown. Ethiopian Airlines and Industrial Development Corporation Limited will be shareholders in the new venture with 45% and 55% of the shareholding respectively. The shareholders have thus far committed USD30m in capital to the endeavour and will initially start with a domestic flight between Lusaka and Ndola and Ndola and Livingstone with a frequency of six and five times per week. It is envisaged that the airline will expand to other domestic destinations namely Mfuwe and Solwezi before introducing regional destinations, to Johannesburg and Harare, to its network within the first quarter of 2022.
- Moving onto the day ahead, no local data will result in markets looking over the border for direction. There is a deluge of data out of South Africa and several releases globally which will give further insight into the broader macro backdrop.
- In terms of the FX markets, the dollar index is currently marked at 96.130 at the time of writing with all the major currencies trading flat or slightly stronger versus the greenback. Investors remain risk averse and thus we have not seen a wholesale retreat for the dollar or the likes of the Swiss franc and yen. The ZMW however remains topside focused and as mentioned yesterday there is a strong chance that we could breach the 18.00 mark before the close of 2020 once again.
Rand and International FX Commentary
- Some sensibility appears to be returning to financial markets with the sharp sell-off related to the Omicron variant losing some of its steam. Far from the panic response when the variant was first uncovered, now the world awaits guidance from scientists and researchers to learn just how transmissible and dangerous this variant might be. Should it turn out to be transmissible but not particularly dangerous, and the vaccines still provide some protection, it might ironically turn out to be good news if it implies that the virus has mutated to a milder form.
- The USD-ZAR has therefore retreated as some calm is restored. Equity markets are also performing a little better, and overall levels of risk appetite appear to be returning. The knee-jerk reaction was unfortunate and will likely cause economic damage, especially to SA that has suffered a devastating blow to its tourism sector at the worst possible time. The upside to this, if there is one, is that asset prices will likely get distorted even higher as central banks now turn cautious in their desire to normalise monetary policy. The Fed, for example, might think twice before accelerating the pace of the taper, and that should support stock markets and commodity prices.
- Commodities need some support after the negative impact the news of the variant exerted on prices. They, too, have stabilised and will now be treading water alongside many other markets that await further guidance on the outlook for the economy. However, they might receive a boost today as Fed Chairman Powell, together with Treasury Secretary Yellen, address the Senate Banking Committee. Both are likely to reassure senators that their institutions plan on supporting the economy to ensure that the economic recovery is not derailed.
- Also of interest today will be the slab of data scheduled for release, which will include, amongst others, the money supply data, government finance stats, the trade data and the latest labour market report, which will give an update on the unemployment rate. While the growth in money supply will remain soft and support the ZAR, the trade surplus may soften considerably, while the unemployment rate is expected to remain wide. On aggregate, the data is unlikely to be particularly ZAR positive. However, it has sold off so aggressively in the past two weeks that a recovery of such a stretched undervaluation is in order.