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Local Market Commentary
- As we exit 2021 and enter 2022 mining companies are going to be acutely aware of the challenges that they face going forward. Base metals have recovered strongly off the COVID-19 pandemic lows albeit that they are not at the 2021 highs with copper marking time around the $9500.00/tonne while the likes of Zinc are changing hands just north of $3500.00/tonne. There have been a number of reasons for the recovery, from supply issues, to strong recovery in demand from China, to legislative tailwinds for those metals associated with the decarbonisation of the world. Developed markets have enacted legislation which is pushing the agenda of green energy to power everything from homes to cars. Africa is awash with these minerals which are needed to drive forward both the infrastructure projects planned in the developed world as well as the long term changes afoot in how we derive our energy needs.
- This does set the stage for an interesting dynamic which we have seen unfolding to some degree across many regions globally and that is the authorities and workers wanting a greater share of the spoils. Government coffers have been decimated as a result of COVID-19 support packages. Equally the average citizen has seen their wealth and economic well being severely eroded. The gap between rich and poor has grown substantially wider and the social contract has become stretched in many cases. This is ushering a new guard of leadership in many counties with a more left leaning agenda and mining houses are going to need to navigate this. We expect higher taxes and royalties to become the new norm as governments look to build their balance sheets to support new social programmes which have arisen as a result of COVID-19
- The Zambian Kwacha (ZMW) has come under some selling pressure over the past two weeks. For context, since the more than three-month high hit in early December, the local unit has lost nearly 3% as higher importer demand for hard currency weighs. Yesterday, the ZMW recorded its 9th straight daily loss against the dollar to close north of 16.500.
- While the ZMW has traded on the back foot, it is worth noting that it remains Africa’s best-performing currency in December so far and on a year-to-date basis. In December, the ZMW has chalked up gains of almost 8%, while on a year-to-date basis, the local unit is up by 28%, outperforming 19 other African currencies tracked by Bloomberg. This year’s broader ZMW strength has been partly driven by an improvement in sentiment on the back of a change in leadership and prospects that the new government will resolve the country’s fiscal challenges and elevated copper prices, the country’s main export. More recently, the announcement that the International Monetary Fund had reached a staff-level agreement on an extended credit facility arrangement with the Zambian government, another key step toward debt restructuring, has added a tailwind to ZMW bulls.
- Going forward, further room for appreciation will likely depend on the new government making significant headway in implementing the required economic reforms and addressing the existing structural challenges. For now, despite the recent losses, the ZMW is likely to close out the year as the best-performing African currency against the USD.
- Moving over to the U.S., more data will be released today that hold some interest. U.S. durable goods orders recorded a second consecutive month of contraction in October, coming in at -0.4% m/m. Weaker aircraft orders held back the headline figure, while orders for capital goods fell 4% m/m as capital expenditure showed signs of fading momentum at the start of the final quarter of 2021. Overall, though, production is still being constrained by logistical bottlenecks and labour and material shortages. This could keep durable goods order growth contained in the near term while continuing to contribute to high supply-side inflation. Should this continue to result in pass-through to broader inflationary pressure, we will likely see Fed communication maintain its current hawkish undertone.
- U.S. core PCE has risen rapidly through 2021, from 1.5% y/y in December 2020 to 4.1% in the October print. Despite supply-chain constraints and bottlenecks, seeing inflation surging to multi-year highs, returning demand post-lockdowns and vast levels of fiscal and monetary stimulus have kept consumption expenditure well supported. Furthermore, U.S. labour market dynamics continue to show strong signs of recovery, which will likely keep inflationary forces intact for some time. The continued acceleration of US PCE core, being the Fed’s preferred gauge of inflation, has already seen the Fed announce a faster taper of its asset-purchase program. However, the taper process is expected to conclude in March 2022, meaning there is still room for inflation to run hot into 2022.
- News that the Omicron variant is a lot less severe and may not overwhelm the healthcare sectors means that a significant risk to financial markets has now dissipated. Governments that responded with harsh measures and restrictions now look like they overreacted, and it would not be surprising to see them reverse their decisions. Risk appetite has improved considerably, and the appetite for safe havens has dropped. Bad news for the USD, good news for riskier asset classes, including emerging market currencies that have appreciated overnight and look set to extend those gains.
Rand and International FX Commentary
- Prevailing logic suggests that the USD should appreciate further in the coming months due to the divergence in monetary policy that exists between the US and its major trading partners, yet yesterday, the exact opposite happened. Furthermore, it happened despite the US’s GDP data and consumer confidence data beating expectations to the topside. If the logic held, such data outcomes should support, not detract from the USD’s performance. Once again, the reasons as to why relate more to what has been priced in as opposed to the data taken at face value.
- The Fed’s outlook on monetary policy is well known by now. Furthermore, due to the dot plots of individual member expectations and the number of Fed speakers that take to the podium or hold interviews, the trajectory of tapering and interest rates has been well telegraphed. It is, therefore, logical to believe that the market is now fully priced. If there is a risk, it may be that the UK and Europe unwind their restrictions faster than anticipated now that there is clear data to show that the Omicron variant is far less severe than previous variants.
- Stock markets have rallied once again, and overall risk appetite is improving. The desire to expose portfolios to safe-haven destinations has dropped significantly and as a result, so too has the trade-weighted USD. It backed away from yesterday’s highs just as it showed signs of gaining momentum and triggered a solid recovery across many emerging market currencies, including the ZAR. The USD-ZAR is now on the verge of testing and potentially breaking through key support at 15.6600, which would set a stronger ZAR recovery under way if penetrated.
- The latest studies on the Omicron variant show that it is far less severe, with a study out of SA confirming that it could be as much as 70-80% less severe. A similar study in the UK has come up with slightly less impressive results but still confirms that although highly infectious, that it is far less severe than previous strains. The need to lockdown and impose severe restrictions now looks like a clear overreaction of governments, and they may well reverse their decisions.
- This is excellent news if this Omicron variant helps the global economy take another step towards herd immunity through mass infection and recovery across both the vaccinated and unvaccinated. It also means that 2022 could be a much stronger year economically, which ultimately means that overall risk appetite levels could improve further. In the near term, while the ZAR and other emerging market currencies are focused on risk appetite, this may well offer them the ability to extend their overnight recoveries.