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China’s top official for Africa to visit Zambia

June 13, 2022by Nicholas Kabaso
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Local Market Commentary

  • China’s top official for Africa, Wu Peng, is headed to Zambia this week, just days after President Xi Jinping held phone talks with his counterpart President Hakainde Hichilema. Recall two weeks ago, Xi held his first conversation with Hichilema, where he hailed the two nations’ “all-weather” friendship and reiterated Beijing’s commitment to “consolidate and deepen” bilateral ties. Meanwhile, Hichilema raised the issue of the country’s debt and said the two leaders discussed the potential for greater cooperation and their “shared commitment to working together to address and resolve the debt issue” in a statement. However, a readout of the call released by the Chinese foreign ministry made no mention of this. Nonetheless, Zambia’s debt remains a key focus in bilateral relations as China holds the largest share of loans, and thus added focus will be on Peng’s visit to Zambia.
  • The industrial metals complex all finished the Friday session lower as the threat of tighter monetary policy hit home after inflation in the US hit a 40-year high. The benchmark 3m LME copper price slipped below the $9500.00/tonne handle and the slide has continued during this morning’s Asian session with another 0.8% worth of losses booked for the session thus far. As we head into the EU session copper is trading at $9370.00/tonne, technically $9277.00/tonne provides the first support level before the congestion around $9200.00/tonne.
  • The key international event this week will be the Fed meeting on Wednesday. The Fed will most likely hike by 50bp and then suggest that another is coming at the next meeting. Powel will probably be non-committal to moves beyond that, but last week’s inflation surprise suggests that there is an outside risk that he could flag another big move for the September meeting. There’ll be new forecasts which suggest upward revisions to inflation but possibly lower revisions to the growth estimates. 
  • Shifting to the FX markets, the Zambian Kwacha is set to extend Friday’s gains in the week ahead on the back of sustained central bank support and dollar sales by companies preparing taxes. This week’s value-added tax is expected to see corporates, including mining firms, offload dollars. 
  • Meanwhile, the USD has extended its gains from Friday’s session as investors continue to price for more aggressive Fed tightening following the higher-than-expected CPI print. The rally in the USD comes as the 2yr US Treasury yield hit a 15-year high ahead of the much-anticipated FOMC rate decision on Wednesday. It is widely expected that the Fed will deliver another 50bps rate hike this week as it continues its fight to rein in inflation expectations. Following the inflation shock on Friday, traders are pricing in 50-50 odds of the Fed delivering a 75bps hike next month. The stronger dollar and bets for a more hawkish Fed have come as a headwind for developed and emerging market FX, both a sea of red this morning. Crypto has also taken a beating on the back of the stronger USD and expectations for a more aggressive Fed, with Bitcoin plunging to its lowest since December 2020.

 

Rand and International FX Commentary

  • Last week, US inflation data significantly disrupted financial markets and negatively influenced emerging market currencies. In the space of a day and a half, the ZAR wiped out most of the appreciation achieved through the month prior and highlighted just how susceptible emerging markets remain to a significant correction in global equity markets. Investors have positioned themselves for central banks to remain aggressive in their tightening and are starting to more actively price in the risk that earnings results will be poor.
  • However, unlike previous equity market corrections, this time, bonds have not offered much of an alternative to shield portfolios against capital losses. In some cases, they have performed even more poorly than equities adding to the pressure on fund managers that might seek to withdraw more liquidity from the markets, although cash is an equally poor alternative given the high inflation rates and the deeply negative real rates.
  • It all makes for a deeply chaotic start to the holiday-disrupted week ahead that might also suffer from a slight dip in liquidity and the disruption of a mid-week halt to trading that may lead some investors to hold uncomfortable positions through the public holiday. This raises the degree of uncertainty and volatility. Under such conditions, the safety of the sidelines might be the best option, allowing markets to stabilise after the US inflation shock of last week.
  • In the way of domestic data, retail sales will be the week’s main event, due for release on Wed. However, given the state of global markets and the importance of offshore data in driving sentiment, any local news is likely to be overshadowed by offshore developments, equity markets and the rise in bond yields across the globe. Emerging market currencies appear vulnerable at the start of the week, and the ZAR will not escape this sentiment. It all offers exporters another bout of respite after the persistent appreciation that took place through May and June that had some exporters concerned.

Nicholas Kabaso

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