Sasfin : Forex Daily Market - SA’s mining sector saw production rebound

Today's Talking Point

Mining Production Y/Y: Nov

Expected: 2.5%

Prior: 3.4%

Analysis: SA's mining sector saw production rebound notably in October on a month-on-month basis, reaching its highest level in seven months, despite the industry grappling with the unstable power supply, ageing mines and sluggish economic growth. However, the recovery in the mining sector is likely to stall in the months ahead, likely starting with the November figures, against the backdrop of the drop in global commodity prices during the period under review and the discovery of the new Omicron COVID-19 variant, which stoked lockdowns around the globe, weighing down on exports. In addition, the sector's ability to grow also remain constricted by the persistent structural impediments within the economy and underinvestment in the sector in prior years. How market-moving the data will be is questionable, however, given that the delays in releasing it make it now very dated.

Rand Update

The USD-ZAR appears to have found a bottom in the very short term. The pair has repeatedly struggled to sustain a break below 15.3500, and the same applied yesterday. This morning, the pair is trading above 15.4200 with some weakness in Asian markets, raising risk aversion to nudge investors out of emerging markets. Focus through the week will turn to the local data in the form of retail sales, CPI and mining production, but arguably just as important will be the earnings results on Wall St.

A strong set of earnings on Wall St will almost certainly bolster risk appetite and could help sentiment towards emerging markets. US markets are already fully positioned for a strong economy that could withstand higher interest rates. But for a commodity currency like the ZAR, a strong global growth performance is good news for commodity prices and SA's terms of trade that have shown modest signs of rising back up recently.

Investors should also keep one eye on political developments currently doing the rounds. The RET faction, seemingly championed by Lindiwe Sisulu is causing some angst within ANC ranks and doing little to foster a constructive environment in which confidence in SA's longer-term future can build. Although this would not be market-moving just yet, it is laying the foundations for an internal ANC tussle that will likely intensify as the year wears on.

Bond Update

The All-Share Index has been well supported for the year so far, with a 2.8% rally primarily linked to buoyancy in commodity miners such as Anglo-American Platinum and BHP Group, while European luxury goods producer Richemont has languished amid economic restriction and growing political tensions in Europe.

SAGB's are caught between improving growth sentiment and the rising probability that we see tighter SARB policy. Less restriction on the movement of people in SA will likely be supporting the recovery of sectors such as retail and tourism, although structural damage to the economy that has been well reflected in record-high unemployment rates suggests that it could still take some time for consumption rates to return to pre-lockdown levels. This is to the core theme for H1, namely whether economic activity is rebounding sufficiently to warrant policy tightening. If it remains entrenched, weak growth in the months ahead will challenge the SARB policy outlook. On the other hand, a recovery in consumption demand could ultimately be inflationary given the inflation pressure at the producer level.

The major data release of the session ahead will be from the mining sector, with expectations for a recovery in output bullish for the trade balance and, by extension, the ZAR. A bond auction will also form a litmus test of underlying market sentiment to SAGBs, just five weeks ahead of the national budget presentation. With much of the inflationary pressure driven by supply-side factors, how much a tighter SARB outlook will assist is up for debate.

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