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Local Market Commentary
- Opposition United Party For National Development (UNDP) leader Hakainde Hichilema is set to be inaugurated as the new President of the Republic of Zambia today. This follows a landslide victory at the August 12 elections. Note many investors anticipate that Hichilema, who will be sworn in today, will be able to secure an IMF economic program and associated $1.3bn loan by April next year. Moreover, in-vestors expect the president-elect to revive the economy, which has been wrecked by years of overspending that led to the government defaulting on its external debt since November.
- 3m LME Copper had a stellar start to the week adding 2.58% to close at $9273.50/tonne yesterday. News of withdrawals at LME ware-houses matching levels last seen six years ago the primary driver however a weaker dollar also assisted at the margin.,
- Tight supplies as a result of Chinese supply bottlenecks as the delta variant disrupts production seeing a drawdown in inventories. The premium of spot over the 3m contract is currently at $27.95/tonne which is the widest it has been since the 23 April 2021 indicating the tightness in the near dates.
- U.S. housing starts will be the main release of the day, and investors will be hoping that housing starts remain at current elevated levels of increase slightly. More recently, a combination of inflation in building costs and the relative expense of homes has dampened activity in the sector. As per consensus forecasts, the estimates expect 1.6mn starts, which is roughly in the middle of the prior reading and the lat-est reading. Anything closer to the 2.0mn mark would be considered a strong reading and bolster the case for an earlier taper. However, ahead of the Jackson Hole symposium later this week, most data are likely to be ignored.
- Sentiment across the globe has, however, picked up regardless of the symposium. Some positive news that Pfizer BioNTech has received full FDA approval for its vaccines confirms that the vaccines are considered safe for use and do not need to rely on the special emergency dispensation to be distributed. It is hoped that other vaccine manufacturers will follow suit and that the news will encourage more people to get vaccinated. Financial markets have responded positively to the news, and overall levels of risk aversion have once again abated.
- Finally, the Biden administration’s efforts to muscle through an enormous social spending programme is facing an internal test with not all Democrats on board with the enormity of the package. No Republicans will vote for it, meaning that the executive within the Democratic party will have their work cut out for them to convince those less comfortable with such enormous spending that it is the right strategy to follow. At $3.5 trln, it is indeed a massive package and will take the U.S. closer to achieve a more socialist society, with the tax burden to match.
- In the FX markets, a bullish bias remains entrenched on the Kwacha as the local unit extended its gains at the start of the week to end south of 16.800, according to Reuters data. Meanwhile, the USD corrected sharply from its highs yesterday. Although it has stabilised after yesterday’s correction, it now appears as though many investors are scaling back their expectations for hawkish guidance from the Fed. It may in other words, be too soon for a significant shift in U.S. policy. News of full approval for the Pfizer BioNTech vaccine has also taken the edge off risk assessments, and equity markets globally have recovered as well. Ahead of the Jackson Hole symposium, it would not be surprising to see the USD settle down into a more consolidative range as we await guidance from the Fed.
Rand and International FX Commentary
- The new week began with global market sentiment turning positive early on, a snap change from last week’s strong risk-off conditions, with investors now looking to book profits on the dollar’s August rally. Meanwhile, markets are perceiving the switch of the US Fed’s an-nual Jackson Hole symposium to a virtual meeting as a Fed wary of risks from the COVID-19 delta variant, which has tempered bets that the central bank will announce a forthcoming tapering of asset purchases.
- As for the ZAR, sentiment towards the local unit improved as it led emerging market currencies higher on the day yesterday. Following the worst performance amongst EM currencies last week, the ZAR may be ripe for a short term pullback should the market deem the lo-cal currency as oversold. Ultimately, yesterday saw the ZAR gain 1% to close at 15.1400/$.
- Market positioning data also points to some near term ZAR strength being on the cards given its month-to-date plunge which has out-paced all other EM and major currencies. The latest CFTC positioning data showed that speculators increased their net long ZAR bets for the second straight week, despite sustained weakness in the spot market. The increase resulted from an increase in gross long bets and a drop in gross short bets, suggesting the market sees the possibility of a pullback and deems the ZAR’s recent downside moves as over-stretched. While the data covered the week ending August 17 and thus does not include the ZAR’s subsequent losses at the end of last week, a persistent increase in the net long position would signal that the market continues to see a probable near-term reversal for the USD-ZAR.
- Meanwhile, according to data compiled by Bloomberg, investors continued to shed exposure to EM assets for a second week. On aggre-gate, US-listed ETFs that invest in EM bonds and equities recorded outflows of $111.6 million in the week ending August 20 as a combina-tion of risk-off and regulatory crackdown risks in China weighed on broader risk appetite. While the data marked the longest losing streak for EM ETFs since June 2020, SA managed to snap the general trend as it attracted $53.3 million worth of inflows, all coming the way of equity ETFs.
- While much uncertainty remains, with broader market trends still likely to be linked to the Stateside monetary policy outlook going for-ward, near term gains can be expected in the case of overstretched markets and investors looking to buy the dip. Such could apply equal-ly to the ZAR, given its relative underperformance over recent weeks, but the caveat of its higher sensitivity to deteriorating global senti-ment remains. As for the day ahead, domestic second-quarter unemployment data will take the spotlight, with markets eyeing the impli-cations on aggregate consumption and tax intake should labour market dynamics remain shaky. The SARB’s leading indicator for June will also be released and offer insights into the base with which the economy headed into the second half of the year.