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Today’s Talking Point

Oil Update

Analysis: Oil remains under pressure this morning, tracking a broader slump in commodity prices as recession fears continue to rip through the markets. Brent has sunk to $108 per barrel, extending its decline from yesterday and posting a loss of more than 6% over the last two sessions so far. WTI, meanwhile, has plunged to $103 per barrel, but at one point, was trading below $100. Global recession fears were amplified yesterday by Fed Chair Powell’s testimony to Congress, where he said that a soft landing for the US was very challenging but that more rate hikes are still needed to contain inflation. A slowdown in US and global growth will help to lessen some of the tightness in the market at the moment, but as we have noted before, there is still a long way to go before the market will return to a more balanced structure. Nevertheless, we are seeing demand for downside protection on oil rise, indicating that traders are becoming a bit more concerned over the impact of weaker demand. Oil price forecasts, therefore, are likely to be revised a bit lower over the next few weeks. 

Rand Update

The big news out of SA this morning is that Health Minister Phaahla has signed off on the removal of the last remaining COVID-19 restrictions in SA. These include the wearing of masks in public, curbs on gathering sizes, and border checks for COVID-19. This is welcome news, and will allow for a more complete recovery of the South African economy. Recall that the economy already experienced some improved momentum at the start of the year due to SA’s initial phase of reopening, and although it is unlikely to last, it will have a material impact on the ZAR’s performance through SARB policymaking and trade balance dynamics.

Concerning the former, note that CPI stats released yesterday showed headline inflation in SA topped the ceiling of the SARB’s 3%-6% target range for the first time in more than five years. Specifically, CPI growth accelerated to a five-year high of 6.5% y/y, while core inflation, which strips out food and fuel costs, accelerated to 4.1% y/y. While this all but confirmed that a 50bp rate hike is on the cards for July, the ZAR’s reaction was muted as this was, by and large, already priced in.

As for the session ahead, the market will be digesting the final chapters of the Zondo report into state capture that were released yesterday. Wrapping up nearly four years of work, the final parts of the report deal with a number of topics, including the SABC and the state security agency, the Vrede dairy scandal, parliamentary oversight, and also money flows and how money that was obtained through state capture was moved out of the country. Notably, President Ramaphosa has been implicated as a by-stander in the Prasa scandal. There is therefore some reputational risk at stake, and Ramaphosa will need to respond to the allegations or face a loss of legitimacy in his anti-corruption drive that could be argued to be nebulous without a deep clean of those in power through State appointment

Bond Update

Investors will have a flurry of new information to digest in the session ahead as the Zondo Commission's findings make their way to public discussion. Notably, incumbent president Ramaphosa has been implicated as a bystander in the Prasa scandal. There is, therefore, some reputational risk at stake. Ramaphosa will undoubtedly need to respond to the allegations or face a loss of legitimacy in his anti-corruption drive that could be impeded without a deep clean of those implicated. 

The report said that "people who wielded public power, whether as leaders of the ruling party, cabinet ministers, MPs or members of law enforcement agencies, were obstructive, refused to assist or simply stood by when there was a duty, whether constitutional, legal or moral, to actively assist the [Prasa] board." Note that the board was unfairly dismissed and had to go to court to get reinstated. The report highlighted that "President Jacob Zuma gave [allegations of corruption from the board] no support. The then deputy president of the ANC and of the country, now President Cyril Ramaphosa, gave it no support. Indeed, all the top six officials of the ANC gave it no support. The parliamentary portfolio committee on transport was openly hostile to this board,".

This is a politically difficult time for the ANC, which remains prone to infighting with its commitment to rooting out corruption, leaving a narrow road to political salvation. The whistle-blower on the theft of illegally held foreign capital at Ramaphosa's farm was Arthur Fraser, who has been directly implicated in the report with the recommendation to investigate for "prima facie [or apparent] criminal acts".

What follows is an open question concerning the future of the governing party, with ANC support levels clearly under pressure when looking at polling and recent municipal by-election results in historically strong support areas like Soweto. There is likely to be a further legal inquiry into those implicated, which forms considerable tail risk when considering what the market still might not know. This supports the view that SAGB yields could remain buoyant in the long end in particular, perhaps barring an environment characterised by the continued outperformance in fundamentals and clear evidence of fiscal consolidation.

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Research Team
Sasfin Bank, Media