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Local Market Commentary
- There was a broad-based recovery across the base metal group yesterday following strong losses in the previous sessions. Bargain hunt-ers were noted buyers on the dips throughout yesterday’s trading session with a stable dollar assisting at the margin.
- This morning the copper markets are on the backfoot in the Asian session with the threat of supply issues now fading into the back-ground. The threat of strike action at the world’s largest copper mine Escondida has faded now that mine management and labour had reached a tentative deal for a new contract. The union did however say that it would take two more days to submit the new contract to the workers to vote on which does leave an outside chance of failure.
- Meanwhile, Reuters has reported the following – Peruvian mining companies will pay a record 12 billion soles ($3 billion) in taxes in 2021, more than twice what they paid in 2019 before the pandemic, the industry group representing the sector said on Tuesday. Mining is a key source of tax revenue for Peru, the world’s No. 2 copper producer. Miners have benefited this year from higher prices and a weak local currency, which boosted their revenue and increased their tax bills due to exports sold in dollars.
- The finance ministry in a statement, said that Zambia will obtain around $1.3bn in Special Drawing Rights (SDRs) from the International Monetary Fund. According to the ministry, the allocation, a part of new reserves created by the IMF, will be used to overcome the devas-tation wrought by the coronavirus pandemic and boost foreign exchange reserves. The ministry added that the SDR will double the na-tion’s foreign-exchange reserves, help build external resilience and support current relative stability in the foreign exchange market, which in turn is expected to facilitate foreign and domestic investment flows going forward.
- Moving over to the US, given the sensitivity of financial markets to inflation and monetary policy dynamics at the moment, traders will pay close attention to the July CPI report. The report could offer some guidance on the path of monetary policy. While the headline figure will be watched closely, investors will also keep an eye on underlying inflation as they look to gauge whether the strong price growth seen re-cently is transitory or here to stay. Despite a resurgence in COVID-19 infections, central bank speakers have turned slightly more hawkish, with policymakers talking more and more about the winding of bond purchases and eventual rate hikes. A stronger than expected CPI print will bolster bets for the Fed to begin normalising policy earlier than communicated.
- Chicago Fed President Evans reiterated that point by adding that he felt conditions could be ripe for taper discussions by the end of the year. He felt that it was likely that the labour market would have improved a little further by then and that the discussions would there-fore be more appropriate. He also added that it would not be prudent for the Fed to respond to the current spike in inflation, with so many risks still present.
- In so far as bond yields and the USD are concerned, both are primed to go higher if today’s inflation reading surprises to the topside. The risk exists that it does, given the recent trajectory it has been on. This is a factor that will weigh not just on US markets but EMs that have up until now enjoyed inflows on account of lower DM yields.
- In the FX markets, the Kwacha was marginally weaker yesterday. Meanwhile, the USD remains on the front foot this morning with all eyes turning to the inflation report later today. Expectations are that the USD will likely remain well supported with the inflation data more likely to surprise to the topside than down. The trajectory remains higher although momentum does appear to be waning. None-theless, this is one reason why the Fed would want to taper and these high levels of inflation which far exceed the target, place consider-able pressure on the Fed to respond.
Rand and International FX Commentary
- The ZAR traded weaker for the fifth consecutive day yesterday, ultimately ending 0.50% in the red as it closed above the 14.8000/$-handle. While the local unit was not alone in trading lower against the still-buoyant US dollar, the ZAR did lead EM currencies weaker dur-ing the day, with sentiment remaining particularly dim in the wake of cabinet changes last week. However, the ZAR’s losing streak has co-incided with broader moves in currency markets over the past week, the major theme being US labour market health and Fed taper talk, which has bolstered the USD.
- Although for June, yesterday’s domestic manufacturing data came out weaker than expected even prior to the production dip which like-ly ensued during the riots in the following month. While still recording year-on-year expansion, manufacturing output contracted from the prior month as it fell 0.7%. Given the current backdrop of rising manufacturing costs, weak demand, and deteriorating business and investor confidence, a sluggish recovery is likely ahead for the sector. Rising global demand is one of the few buffers still present. As such, its contribution to economic growth as we advance is likely to be minimal.
- With sluggish output growth and weak business confidence, SA’s economic recovery is ultimately in the balance, as is the future resilience of the ZAR by extension. With stateside taper talk likely commencing and other emerging market central banks looking to hike rates in the near future, should the SA’s growth prospects continue to languish, this will ultimately pressure the SARB to hold back from tightening policy at too aggressive a pace. With a lower interest rate differential, the appeal of SA’s relatively high yields to foreign investors will be reduced. Alongside this, higher fiscal risks will also accompany lower-trend growth should the government fail to reign in expenses and debt requirements.
- A more recent update to SA’s business conditions comes with the SACCI business confidence index due later this morning. Although sen-timent amongst business players has improved, businesses continue to face risks that could keep the index from rising further. The rein-troduction of lockdown restrictions by the government aimed at curbing the spread of the delta variant and the unprecedented looting and civil unrest in KZN and parts of Gauteng, which disrupted supply chains and economic activity, suggest that business sentiment likely took a knock in July. Although the violence has subsided, the adverse impact of the looting and protests is likely to continue to be felt in the months ahead, which will further weigh on sentiment and impede the economy’s growth recovery prospects.
- Externally, market participants will turn to the latest US CPI print for July. Should July’s inflation stats persist above the 5%-mark, this will provide the greenback with a further tailwind as tapering bets grow. While it remains to be seen just how transitory inflationary pressure in the wake of COVID-19 and lockdowns will be, comments from Fed officials earlier in the week suggest that inflation is already at a level where the central bank should begin reducing monetary support.