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Elevated copper prices provide some support to Zambia bonds

June 7, 2021by Nicholas Kabaso
  • Base metals focused on the US Non-Farm Payrolls number in the close of last week. The number showed that although the economy is recov-ering, the pace is not at a level which would bring forward a policy tapering from the Fed.
  • After initially rebounding this morning, copper has slipped in the Asian session with a stronger USD and demand concerns from China seen as the major drivers, at the time of writing the red metal is holding just north of the $9900.00/tonne mark.
  • Chinese copper imports fell 8% in May on a month-on-month basis. This is second consecutive month that imports have fallen as high prices are affecting demand dynamics. The General Administration for Customs reported imports of 445 725 tonnes in May.
  • Elevated copper prices and expectations of a deal with the IMF have provided some supported to fixed income assets (both local and dollar) in Zambia, even as the country shows no near-term prospects of resolving a default on its Eurobonds. Data from a June 3 Treasury bill auction shows that yields fell across maturities for the first time in a year. Longer-dated tenors have advanced too amid growing demand. Ten-year bond yields fell to 31% at a May 28 auction, the lowest in a year and down from the 34.5% investors had demand since February. Zambian Eu-robonds have also rebounded, with the 2024 bond returning around 17% in the past quarter, becoming Africa’s best performer, despite a de-fault in November last year and little progress on the debt restructuring front.
  • Stateside, jobs data released last week strengthened the argument for an economic recovery. The private sector ADP, weekly jobless claims and the payrolls figures all alluded to a solid recovery in the labour market, albeit that a stronger recovery had been priced in. Econometric models have not been very good in gauging the recovery thus far and once again overestimated the propensity for the payrolls numbers to jump. However, that should not detract from the anticipated jump that will occur in H2 2021 when unemployment cheques cease, and house-holds are forced to look for employment. Demand for employment appears to be reasonably strong, and therefore, any under-performance in the data currently is likely to be replaced by a stronger showing later this year. The USD responded negatively to the softer than expected payroll data, but that has just as much to do with economic policy and how it has exacerbated the twin deficits.
  • After showing some early signs of staging a solid recovery, the USD’s fragility shone through on Friday following the weaker than expected non-farm payrolls figures. Investors had anticipated more, and what they got instead was a sign that the economic recovery was proceeding slower than expected. This has given rise to speculation that the Fed will persist with its ultra-accommodative monetary policy stance for long-er than first thought, which will promote the twin deficits that undermined the USD through the past year. Looking ahead, until the data starts to place the Fed under pressure to consider tapering, the underlying boost to the USD will be substantially less.
  • Looking ahead, Wed will see the Democrats press ahead with their next round of stimulus. U.S. Treasury Secretary Yellen has argued that it will only amount to some $400bn a year which will be insufficient to drive inflation dynamics to the point of concern for the Fed. President Biden, for his part, will attempt one last time to achieve a bi-partisan deal; however, should he fail to do so, the Democrats will press ahead with pass-ing the bill regardless of the Republicans’ support. It sets a dangerous precedent of what else is to come, will ensure a bigger role for the gov-ernment to play in the economy and will saddle future generations with the burden of repaying all the debt that will be accumulated.
  • In the FX market, the Kwacha is expected to remain on the back foot as demand for hard currency outweighs supply this week. If there is to be a sustained USD recovery, it will need to be sustained by economic data that is a little stronger than expected. The opposite happened in the payrolls data on Friday and those that had banked on a USD that had depreciated too far amid a strengthening recovery, were left disap-pointed and generally squeezed out of their positions. With the payrolls data out of the way and a new base set for the week ahead, the USD’s depreciative bias may well dissipate unless some of the upcoming data disappoints.
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Nicholas Kabaso

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