Local Market Commentary
- On the political front, the Southern African Development Community (SADC) yesterday said it will have a virtual deployment of an Elec-toral Observation Mission for Zambia’s upcoming general election. Due to the coronavirus pandemic and protocols in place in Zambia, the SADC electoral observation “will engage stakeholders virtually during the pre-election, election and immediate post-election phases,” ac-cording to the statement from SADC. Note virtual stakeholder consultations are expected to take place between August 3-14.
- Rising COVID-19 cases and slowing manufacturing in both the United States and China have taken the shine off base metals overnight. The Delta variant of the coronavirus is testing defences across China and the Southern United States while much of Asia such as Australia remains in hard lockdown which is hitting broader sentiment.
- 3m LME copper shed some 1.65% yesterday to close the session at $9541.50/tonne while Zinc took it on the chin shedding 2.69% on the day to close at $2969.50/tonne.
- This morning we have noticed some bargain hunting in the Asian session with a softer dollar lending support. 3m LME copper has risen by 0.5% this morning to $9589.00/tonne ahead of the London open.
- Stateside, the major release of the session today will rest with the ADP employment report. Fed comment has continued to reflect un-certainty on the pace of the US labour market’s recovery, and it seems likely that there will be a hesitance to hike rates in the absence of a broad-based recovery in overall labour market indicators. With all eyes on the recovery of the labour market and the outlook for con-sumption in the US, investors will keep a close eye on the ADP employment change data, which is used as a precursor for the all-important nonfarm payrolls print.
- Consensus expectations suggest that there was a slight decrease in the number of jobs added in the US economy. That said, economists expect that the recovery in the labour market was sustained last month despite the reintroduction of some lockdown restrictions. Alt-hough the level of slack in the US labour market remains elevated compared to pre-pandemic levels, given the positive outlook for the economy, we expect labour market dynamics in the US to continue to improve in the months ahead as the economy is fully reopened. This will undoubtedly come with a rise in consumptive demand, especially if the much-talked-about stimulus package is given the green light by lawmakers.
- The data will however play second fiddle to the NFP report that is scheduled for Friday. We expect to see some positioning in context of ADP but for the most part the market is likely to remain stalled until NFP has been released.
- The latest on policy around the COVID-19 Delta variant is that further vaccination will be required before society reaches herd immunity. Some have argued that the herd immunity threshold has risen from 60% to 80% in this context. This will raise the uncertainty about labour market and spending recovery, and suggests that the Fed could ultimately remain loose for some time still. Low UST yields and a falling dollar are the obvious market moves, and the risk is that the market gets ahead of itself given underlying inflation potential that could eat away at real UST returns and force the Fed into some tightening in the months ahead.
- The dollar is currently pinned with investors awaiting the release of the next round of US employment statistics which starts today with the ADP numbers. The Fed have been clear in their message that they want to see a sustained improvement in the employment figures before embarking on the taper programme, however we are not clear as to what the golden number is, or what the Fed deems good enough. Unfortunately this leads to volatility on the one side and apathy on the other for the markets. As we enter the start of the EU session, we have the USD Index marked just ahead of the 92.00 level, while the euro is marking time around 1.1870. The big outperform-er in the Asian session has been the New Zealand dollar which rallied hard on the back of the jobless rate falling unexpectedly by 4% in the last quarter raising the likelihood of a rate hike from the central bank in the coming weeks.
- Locally, ZMW bulls remained in control upon resumption of trade to close on the front foot. Note, the ZMW is expected to remain on the front foot this week, supported by increased foreign exchange flows from mining taxes and offshore investors buying government secu-rities.
Rand and International FX Commentary
- The USD-ZAR extended its downwards slide yesterday before paring losses in afternoon trade as risk appetite waned and the dollar caught a bid alongside other haven currencies. However, the ZAR held onto gains as it led EM currencies for the second day, ultimately trading 0.60% stronger to close at 14.3200/$.
- Looking ahead, markets may begin to turn more cautious as the week progresses, with last month’s US nonfarm payroll statistics due Fri-day. With the Fed’s FOMC intent on maintaining accommodative monetary policy and focussing on achieving full reemployment to pre-pandemic levels rather than taming perceived transitory inflationary pressure, the central bank and market participants will be fixated on job market data releases. Strong releases in the coming months will ultimately feed into the Fed’s FOMC meetings and see discussions surrounding tapering asset purchases beginning to heat up. Once the Fed begins tapering asset purchases, tighter financing conditions offshore could pressure emerging markets and, by extension, their currencies.
- As such, these major data releases could see additional volatility, while investors sticking to the sidelines could exacerbate liquidity issues. Having said that, one-week implied volatility for the USD-ZAR continued to retreat yesterday from two-month highs reached last week as traders price in less risk for the currency pair. However, fresh in the minds of investors will be the potential downside risks facing the ZAR. On the back of nationwide violence and looting last month, today’s data release in the form of the economy-wide Standard Bank PMI will likely corroborate the dip seen in Monday’s Absa manufacturing PMI reading. SA’s weak economic fundamentals are starting to show within Standard Bank’s whole-economy PMI, which is estimated to drop below the 50-mark after it slipped for the second straight month in June off the back of a drop in output and stalling new orders. The PMI reading of 51 was its lowest in three months, showing that the expansion in the economy is slowing. The tightening of COVID-19 measures, which hit consumer demand, led to output decreasing for the first time in six months. This is expected to have continued in July as restrictions remained in place, while the civil unrest hit business confidence in KZN and Gauteng.
- Given expectations for a dip, the data may not have much market-moving potential. However, a weak domestic economic backdrop ulti-mately gives the SARB room to support the economy through lower rates for longer. As for the ZAR, the local currency had traded close to 4.50% stronger as of yesterday’s close from last week’s lows around the 15.0000/$-handle. Thus, markets may begin to become more consolidative with some profit taking potential on the local unit after recent moves. Externally, markets will turn to US private payroll data later today, which will likely set the tone for the official jobs report on Friday.