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Copper falls below $9000/tonne

February 3, 2021by Nicholas Kabaso0
  • It was a relatively uneventful start to the week in Zambia amid a dearth of domestic data.  However,  tomorrow will see the release of the Markit/Stanbic PMI reading for February.
  • Copper prices have contracted further today with the red metal trading below the $9000/tonne in the Asian session. There are concerns creeping in of an uneven economic recovery globally with the likes of China releasing PMI data yesterday which disappointed the market. The official PMI number came in at 50.6 for Feb versus 51.3. That said, a fair amount of the reduction could be attributed to the Chinese Lunar New Year period which took place in Feb.
  • In addition to some concerns about economic growth, we have a raft of policy announcements this week and this has prompted some defen-sive trading, copper has experienced an almost vertical rise and some are calling for a clear out of stale longs and short-term technical traders as necessary before we embark on the next leg higher.
  • Stateside, the Democrats have smoothed the passage for the stimulus package by removing the minimum wage bill adjustment. That threat-ened to tie up the entire package in legal debate and challenges. It will need to be tackled in a separate piece of legislation at some point in the future. For now, the stimulus package will be debated this week and it is likely that it could be passed and signed into law before mid-March. That would give the US economy a tremendous boost heading into Q2.
  • Some of the economic data has improved considerably. The latest ISM manufacturing data saw the index jump to a very impressive 60.8 in Feb, with new orders and employment rising. That is the good news in the report. The less positive news is the jump in the prices paid compo-nent. A quick assessment of the acceleration in monetary aggregates shows that US M1 and M2 are growing at nearly 53% and 25% y/y respec-tively, some of the highest growth rates on record. Such strong growth in money supply will translate into more monetary space to accommo-date inflation when demand returns. Given the base off which the new stimulus package will be implemented, the risk of an inflation surge is significant.
  • Progress is being made in recovering from the pandemic induced lockdowns. Restrictions are gradually easing with the latest news being Cali-fornia’s governor together with Democrat lawmakers reaching a deal to reopen schools for student up to the second grade. As the infection numbers continue to moderate and the vaccine rollout gathers momentum, the normalisation of all facets of the economy will take centre stage.
  • In the FX markets, the Kwacha plunged to a fresh low at the start of the week, closing north of 21.800. Note, on a YTD the Kwacha is one of Africa’s worst-performing currencies down by over 3%. A shortage of dollars, deteriorating fiscal dynamics, and deeply negative real rates are some of the factors that have weighed on the Kwacha. Ultimately, unless debt is restructured and better managed, weakness may continue. 
  • Stronger data out of the US and the recent rise in bond yields has helped the USD stage a recovery. The ISM data showed that US manufactur-ing activity had recovered to a three-year high and this appears to have bolstered prospects for the greenback. The USD has gained ground against other low-yielding currencies, while risk currencies have also lost some ground as risk aversion generally has recently ticked back up. Although there is still some speculation on whether the bond market sell-off is over, some investors are more comfortable that the USD has formed a near-term base.

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Nicholas Kabaso

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