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Local Market Commentary
- With the Zambian government committing to a more stable and predictable investment climate, First Quantum Minerals Ltd. has approved a $1.25bn project to expand its Kansanshi copper mine. According to a company statement yesterday, the investment will extend the life of the copper mine until the 2040s and increase copper and gold production by around 25%. First Quantum has also approved the development of a new nickel project which is expected to cost around $100mn. Meanwhile, First Quantum and the government have resolved all points of contention that had been stumbling blocks to the two projects, including an agreement on outstanding value-added tax receivable sum and a plan for the repayment based on offsets against future mining taxes and royalties.
- Note that Zambia is aiming to boost output and attract investment by improving relations with mining companies that have been difficult in recent years. Moreover, the country aims to attract foreign capital at a time when the mining industry faces renewed political and social pressure in some other key copper-producing nations.
- In the US, the labour report showed that the US economy added 428k jobs in April, in line with the March reading but above consensus expectations for a less pronounced increase of 390k jobs. Average wage growth printed in line with expectations, coming in at 5.5% y/y, down 0.1ppts from the previous month.
- While recent data suggests that some cracks are starting to emerge, the overall condition of the US labour market remains healthy as the economy continues to steam ahead. Although this suggests that demand-side inflation pressures are likely to remain elevated in the months ahead, the modest slowdown in wage growth is encouraging for the inflation picture. That said, we still assess inflation risks to be skewed to the upside and the Fed to remain hawkish through to the end of 2022.
- Moving over to the FX markets, the Zambian Kwacha is expected to be on the front foot this week as hard currency supply outweighs demand. Meanwhile, the lull in the appreciation of the USD was nothing more than a breather. The USD is again on the front foot this morning as investors focus on the rising risks and the monetary policy disparity between the U.S. and its trading partners. Fed speakers over the weekend also poured cold water on speculation that the Fed was behind the curve and predicted that it would continue on its tightening path. Of course, Friday’s strong payrolls data only added to the argument for a stronger USD, explaining why equity markets remain under pressure. The EUR hobbles around the 1.0500 mark, while the GBP has slipped to below 1.2300 and shows no signs of stabilising. Not even the JPY has taken advantage of the rise in risk aversion and withdrawal of carry trades, as it climbs above 131.00/dlr this morning.
Rand and International FX Commentary
- As we start a new week, the ZAR remains on the defensive. News that load shedding has been suspended appears to have done little to an investor base which is now worrying about global trends and themes and the consequences of the Fed’s tightening. While equity markets remain under considerable pressure, the prospects for a near-term recovery in the ZAR look slim as overall risk appetite levels remain especially subdued.
- Inflation is not yet under control. Many central banks worldwide have revised their inflation forecasts up for the next 6-8 months, and expectations are intensifying that rates will need to follow suit to cap the rise. An assessment of pre and post-Covid markets shows that the unprecedented amount of monetary stimulation applied during the pandemic has imposed a high degree of asset price distortion across different markets. That is now susceptible to a correction. How deep the correction will depend on how aggressively the central banks continue to tighten monetary policy. They have barely begun to do so, and financial markets are already correcting.
- The real question is how much pain the central banks are prepared to inflict on household and business balance sheets. Shrinking balance sheets which accompany sinking asset prices will materially affect the credit cycle. In turn, economic dynamism will turn more subdued and economic growth will reflect this. This will continue until the central banks believe they have done enough to crimp inflation or when investors believe that asset prices are now so low that they offer plenty of future value. Between now and then, high degrees of volatility, uncertainty and negative returns may become commonplace.
- Finally, speculation has intensified that Putin will announce either a victory or a stronger commitment to the war today, the anniversary of Russia’s victory over Nazi Germany. If true, it could influence the general path the war could take. The sooner this war stops, the better it is for everyone if it helps to stabilise markets. Ukraine can start rebuilding, including the reestablishment of agricultural and mining production. In domestic events, only mining and manufacturing data will be of interest. At the same time, one eye will turn to the ANC’s Eastern Cape conference, which could exert influence on President Ramaphosa’s re-election bid. Beyond that, there is very little positive news in the press this morning that would give rise to any calls for a substantial ZAR recovery.