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Local Market Commentary
- Finance Minister Situmbeko Musokotwane yesterday said that Zambia is seeking to agree on a debt restructuring plan with creditors around the middle of next year after reaching a preliminary understanding for a programme with the IMF. The minister was quoted as saying, “We expect that if all goes well, we should have an agreement with creditors in the middle of next year.” Furthermore, Musokotwane said Zambia’s economy was in debt distress, and the relative stability that it had experienced in the past few months was because most creditors had allowed it to default. Zambia’s external debt includes around $3bn in international bonds, $2.1bn to multilateral lending agencies such as the IMF, and another $3bn to China and Chinese entities.
- Minister of Health Sylvia Masebo yesterday said that Zambia will start administering the Covid-19 booster shot from December 27. Masebo added that the booster shots would be administered to health care workers, the elderly, and people with underlying illnesses such as diabetes, hypertension, and cancer. Meanwhile, Zambia has also decided to introduce Covid-19 vaccines in children from the age of 12-18 years. The minister said the decision to introduce vaccines for children was due to increased COVID-19 cases and deaths among children in the country.
- Industrial metals are flat this morning as the holiday lull sets in. 3m LME copper is currently trading around the $9625.00/tonne mark. Not much going on to be honest.
- The global benchmark for bond trading namely the US Treasury market remains under pressure as we head into the Christmas lull. The rise in US Treasuries comes of the back of US inflation numbers jumping in November cementing fears of a protracted period of inflationary pressure which is going to necessitate a more hawkish stance by the Fed. The Fed has confirmed this in its last meeting and we await further guidance from them at the meeting next month. One thing is for sure is that the Fed will not be the natural bid for the bond market and thus yields will naturally rise across the curve.
- It is against this backdrop that we have a number of African issuers coming to market today. To be fair, most of them are issuing in the space shorter than a year so it’s more a case of liquidity management however Zambia is coming to market with tenors across the yield curve.
- Zambian bonds were previously the shunned by the investment community only bought by short term speculators looking for a quick turn. This has however changed since the new administration has taken power and opened the books so to speak regarding Zambia’s debt problems. The Zambians will be issuing 2023, 2024, 2026, 2028, 2031, 2036 Bonds, what will be interesting to see is what the investor appepite is for the longer duration paper. Investors may stick to the front end of the curve on a risk weighted basis but this remains to be seen.
- In the FX markets, the Zambian Kwacha is set to remain on the defensive next week as festive demand for hard currency continues to outweigh supply. The Kwacha has depreciated on the back of increased import demand and a cut in central bank dollar injections.
- Moving over to the US, no more data will be released this week, which means that investors can start taking stock of the past year and position portfolios for a quiet week ahead. Most of the data released this week offer hope and optimism that the U.S. economy is going from strength to strength and that the recovery from the pandemic will be a strong and sustained one. U.S. equity markets have rallied to fresh record highs amid expectations that the U.S. economy will continue to provide fertile ground for strong earnings results.
- According to the NYSE trading will not take place today, making this a quiet session ahead where it is likely that most markets will either be closed or enjoy an early close, with much the same applying to Monday. It is a long weekend, and next week’s liquidity will be thin as a result. Consolidative trading will therefore be the order of the day through much of today, with trading houses unlikely to take on any significant new trades.
- The USD is currently on the defensive, although it does appear to have stalled ahead of the Christmas long weekend and the thin liquidity week ahead. Position taking will likely be kept to a minimum as investors look for the safety of the sidelines. That being said, any further reduction in risk aversion will likely ensure that the USD loses its safe-haven status and comes under further pressure in the early phase of 2022, with the more hawkish outlook for monetary policy now fully priced in.
Rand and International FX Commentary
- As this will be the final morning note of the year, we would like to use this opportunity to wish all readers and subscribers a wonderful break with family and friends over the festive season. Thank you all for your custom; please stay safe, and let’s all be grateful for all that we still have.
- In the week’s final trading session, before most trading houses and companies shift to skeleton staff for next week’s “holiday” week, the ZAR is on the front foot. The USD-ZAR finally managed to punch through support at 15.6600, opening the door for a more significant appreciative move. The catalyst was the dip in the USD and the gains on Wall St with fresh record levels achieved. Risk appetite has improved considerably, and the desire to rotate to safe havens has dissipated.
- It has been a very strong three weeks for the ZAR, and against all odds. There were plenty of reasons to be pessimistic on the ZAR, from the surging Omicron variant to the travel bans, SA’s sluggish economy and fragile fiscal position, to the Fed’s more hawkish stance. And yet, the ZAR appreciated, unwinding much of the initial sell-off that began in November. Indications at this point suggest that the market might unwind even more of its depreciation.
- Fundamentally, the ZAR has been undervalued on a trade-weighted basis, while by the same measure, the USD is expensive. While one could argue that the ZAR deserved to trade at a discount to offer some yield to people exposing their portfolios to such a troubled investment destination, the USD was arguably too strong for its fundamentals. Against the backdrop of America’s huge twin deficits, the only reason the USD might’ve sustained such a valuation was due to the growing divergence in monetary policy to its major trading partners and the broader rise in risk aversion.
- Looking ahead to 2022, and the USD’s strength might prove a little more challenging to sustain. The twin deficits might narrow slightly but will remain entrenched. The USD remains fully priced for monetary policy divergence, and overall levels of risk aversion will likely dissipate if indeed the spread of the Omicron variant spells the end of the pandemic. If Covid becomes endemic and the global population learns to live with it through established immunity, the global economy can return to full function. Countries that adopt a more conservative stance and embark on monetary tightening will be rewarded. Emerging markets are well down that road and are establishing attractive spreads over the likes of the US. That should lend emerging market currencies some support.
- Although many uncertainties and plenty of cross-currents make direction picking almost impossible, H1 of 2022 could prove far more resilient for the ZAR than a volatile November alluded to. Traditionally, January can be a volatile month for the ZAR. However, any weakness in the USD will help support SA’s terms of trade, enhance the trade dynamics for a little longer and help unwind some of the excessive ZAR undervaluation seen earlier this month. Should Covid indeed become endemic, Omicron may well prove to be a blessing in disguise. 2022 may well be the year that the world resumes normal life and function, and for that, we can turn a little more optimistic and hopeful.