Local Market Commentary
- Zambian markets reopen today, having been closed on account of Heroes and Unity day public holidays on Monday and Tuesday, respectively.
- Zambia has reportedly hired six companies, including EY Advisory Services and PwC, to audit domestic government debt. According to the Ministry of Finance and National Planning, the companies will evaluate “the process related to accumulation and audit of public domestic debt arrears that its various financial institutions owe suppliers of goods and services.” The exercise is expected to take two months. Areas of focus include value-added tax refunds, fuel arrears, farmer input-support program arrears, compensation and awards, and road contract arrears.
- In the base metals complex, the market appears to be entirely focused on economic slowdown concerns and its impact on metals demand in the immediate to medium term. As a result, copper prices have continued to fall, and with China’s end demand recovery also looking uncertain amid the continued risk of a pandemic resurgence, copper prices are unlikely going to significantly recover anytime soon. The 3-month benchmark contract on the LME closed at $7670 per ton yesterday, its lowest since Q4 2020.
- Moving over to the US, Fed FOMC meeting minutes are in focus today. The most important theme in global financial markets at present is uncertainty around the Fed’s policy outlook. It is now widely accepted that the Fed and other central banks will raise interest rates over the next few months, with extremely high inflation and rising inflation expectations making this necessary. However, after this initial bout of front-loaded rate hikes, the outlook turns less certain. The current cocktail of high inflation and rapidly-slowing growth with elevated financial vulnerabilities puts the Fed in a very awkward position. Therefore, the minutes of its June policy meeting, at which it hiked rates by 75bps to take the Fed Funds range to 1.50%-1.75%, will be scrutinized for fresh insights into its policy outlook.
- Shifting to the FX market, EZ policymakers are signalling the risk of recession. High energy prices, the fall-out of the war, rising inflation and interest rates against a backdrop of a global slowdown mean that the EZ economy will find escaping a recession difficult to do. In the UK, the same applies with the added concerns around finalising Brexit arrangements concerning Northern Ireland and PM Johnson’s tenure, adding to the degree of uncertainty. Sentiments towards the EUR and the GBP have soured, and they have both come under considerable pressure, with the EUR-USD trading down to 1.0250 and the GBP down to 1.1930. The EUR is now heading for parity until investors start to rethink The Fed’s stance on monetary policy and investors look to unwind some of the USD’s overvaluation.
- Meanwhile, US Treasuries have stabilised this morning following yesterday’s rally, which took the benchmark 10yr yield down to 2.800% as global recession fears swept through the markets once again. Other core markets couldn’t escape the rally either, with UK 10yr yields down to around 2.05% and Bund yields closing yesterday at 1.175%. The tug-of-war between recession fears and expectations for more policy tightening globally has generated some notable volatility in the fixed-income market, with the MOVE Index, a measure of 30-day implied Treasury volatility, rising to its highest since March 2020. This speaks to just how strong each conflicting force is at the moment, and we may not see volatility subside yet as we have the latest Fed minutes due for release tonight and the monthly payrolls report on Friday.
- These opposing forces are, however, still driving a flattening of yield curves, with the 2v10 spread for US Treasuries sinking below 0.00% once again. The spread between the 10yr yield and that of the 3-month bill has also narrowed sharply to below 95bp and is at its lowest since late 2020. This is viewed as a more reliable precursor to recessions and will be watched closely over the near term.
Rand and International FX Commentary
- USD-ZAR yesterday spiked to 16.60 before retreating off its best levels. The main driver of the move was the strength in the USD that was in turn assisted by the EUR and the GBP succumbing to recessionary fears and expectations of a policy adjustment. The rotation out of the EUR and GBP into the USD drove the greenback firmer across all the crosses in a brutal move that caught many by surprise. This simply builds the asymmetrical risk of the USD retreating once investors start to price in the realisation that the Fed will struggle to hike in line with its guidance.
- However, for now the strength in the USD has impacted commodity prices heavily which will weigh on SA’s terms of trade, although the collapse in the oil price also needs to be factored into that equation. The move in the ZAR was not out of kilter with the behaviour of other emerging markets that also succumbed to the USD’s advances, so one should not look at this in isolation. The move reflects the performance of the USD, not the weakness of the ZAR.
- That being said, the rolling blackouts in SA and the drop in commodity prices will likely prompt the ZAR to consolidate these weaker levels for a little while. Intra-day, some focus will shift to the latest minutes of the Fed that will offer further perspective on US monetary policy. They will not reflect the most recent developments, such as the inversion of the yield curve, and it will be difficult to assess whether the board members have the stomach for hiking into the teeth of a recession and all the troubles that will cause.
- Looking at the trading session ahead, direction will be driven by the performance of equity markets and the movement in US Treasuries. The more US Treasuries dip, the greater the chance that the USD will eventually run out of steam. The USD will remain supported through the adjustment, but the rotation to safety will eventually dissipate, and the USD will have a lot of overvaluation to unwind. The exact timing of that is, however, unclear.