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Local Market Commentary
- To deal with power shortages that have resulted in rolling blackouts for around 12 hours a day in the country, Zimbabwe has asked Mozambique and Zambia to supply it with more electricity. Energy Minister Soda Zhemu was quoted as saying, “we are in discussions with Mozambique for the recently commissioned power plants to give us an additional 180 megawatts. We are also at the final stage of discus-sion with Zambia to get an additional 100 megawatts.” Rolling blackouts threaten to derail productivity in the country which will weigh on economic recovery prospects.
- Meanwhile, Leaders on the continent this week met to discuss ways to minimize the impact of climate change. Africa generates about 3% of global greenhouse gas emissions, the lowest of any continent. But it is more vulnerable than any other region in the world since it is heavily reliant on the natural environment for food, water, and medicine. Speaking at the virtual conference, Nigerian Vice-President Yemi Osinbajo said that African governments need to keep the climate in mind as they try to boost their economies. Note that the Center for Research on the Epidemiology of Disasters reported that in 2019, Africa recorded 56 extreme weather events compared to 45 in the previous year. The extreme weather patterns affected the lives of 16.6mn people in 29 countries. At least 13mn of them were from five countries: Kenya, Mozambique, Somalia, Tanzania, and Zimbabwe. Meanwhile, West Africa had fewer weather-related catastrophes but is feeling the effects of global warming just the same. United Nations officials called for the need to improve cross-border information-sharing and cooperation to handle climate-related crises, while Osinbajo suggested that governments encourage greater use of natural gas and plant more trees to maintain forests that can soak up carbon dioxide and prevent it from warming the atmosphere.
- As with gold, the copper market is squarely focused on the timing of the US taper and next week’s FOMC will be crucial in understanding the timing of this. For now this remains the most watched macro factor with Chinese demand pushed into second place. That said, Chi-nese developments are far from off the radar and events there continue to drive other base metals.
- Concerns over the Chinese property sector over a debt crisis at Evergrande have sparked a base metal sell off across the board. The Chi-nese developer has some $300bn in liabilities and analysts have been working out possible scenario’s which do include a potential gov-ernment bail-out or a collapse which would deepen the risk of contagion across the Chinese economy which is already showing signs of slowing down.
- Moving over to the US, Treasury Secretary Yellen has called on Congress to press ahead with extending the debt ceiling, or the govern-ment will run out of room to fund itself through October. Thus far, very little has been done, and it would appear that party politics will play a role. Senate Republican leader McConnell has reiterated that the Democrats will have to pass the bill on their own, and their major-ity in both the House and the Senate allows them to. He has placed the ball firmly in the Democrats court, announcing publicly the Repub-licans’ unwillingness to countenance any further spending ahead of the $3.5trln infrastructure spending package which the Biden admin-istration wishes to pass. The Republicans will effectively force the Democrats to “own” the entire process, from the tax hikes to the spending they believe is excessive and wasteful.
- In other political news, the vacuum left by the Trump administration when it withdrew America from the Trans-Pacific Partnership agree-ment has given China an opportunity to grow its influence in global trade relations. It has applied to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) that replaced the TPP for inclusion. It will not be easy to gain entry, and there will be some resistance from Japan who will want to uphold extremely high standards, but it very clearly shows that China might well fill the gap that the U.S. opened up in what may turn out to be a long-term policy misstep by the Trump administration.
- Ahead of next week’s FOMC meeting, the USD appears to have consolidated yesterday’s gains. It remains rangebound for the most part, and directional momentum is still lacking. However, there is an underlying firmer bias to the USD promoted by the global stock market correction, which lifted overall levels of risk aversion, and a correction lower in commodity prices. Both will count against emerging mar-kets that will tend to rotate to the safety of the USD. Only the upcoming weekend may be enough to dissuade investors from taking any significant position and keep the USD rangebound. Meanwhile, the Zambia Kwacha is likely to remain largely stable next week on the back of improving investor sentiment.
Rand and International FX Commentary
- Global FX markets took a dive yesterday as the US dollar surged ahead on more robust than expected retail sales data. The stronger stateside data came despite labour market growth subsiding in August and painted the picture of healthy consumption dynamics in the US, ultimately reducing the impact of softer inflation data earlier in the week. This feeds the view that there are is yet more upside pres-sure on inflation occurring than simply base effects, especially as labour market slack is taken up. The risk here for the Fed is that it may be forced to begin abandoning its transitory inflation narrative and potentially announce prospects to reduce asset purchases.
- While the potential for tapering asset purchases comes into view, emerging market currencies that thrive on loose offshore financing conditions will likely be pressured into trading with a downside bias. This should indeed be the case for the local currency. Yesterday con-tinued to highlight the ZAR’s sensitivity to a strengthening US dollar as it traded amongst the laggards of the EM sample of currencies. Closing 1% down just shy of the 14.6000/$-handle, the local unit extended losses to a third day.
- Looking ahead, higher ZAR volatility is still being priced into the market. Implied volatility on USDZAR at-the-money options continued to rise yesterday, with the one-week tenor surging to its highest since mid-July. This suggests a higher degree of risk is to be expected as the following week holds both the Fed’s FOMC policy event, as well as the SARB’s rate decision. As for this week, the ZAR is currently sitting at the bottom of the EM currency sample as it has traded roughly 2.50% weaker against the USD from last week’s close. Should the USD continue to trade with a tailwind ahead of the important policy events next week, pressure on the local currency should be comparatively heavier given its higher-beta nature.
- As for the day ahead, the external data card remains hot with the final Eurozone inflation print for August, followed by a provisional Sep-tember US consumer confidence release. After yesterday’s US retail sales data, which appeared to revive prospects of sooner Fed policy tightening, markets will be eyeing consumer confidence dynamics for an indication of how US consumption demand has held up in Sep-tember thus far. The consumer confidence index fell to a near decade low at the last print as higher inflation and smaller job gains in Au-gust weighed on consumer sentiment. However, should sentiment have remained subdued, there is the potential for the USD to lose some of its shine heading into the weekend. In the meantime, sentiment in Asian stock markets has improved, with Chinese equities broadly in the green following this week’s string of losses. As for emerging market currencies, the market’s mood remains mixed, but a major return of risk appetite is unlikely ahead of next week’s US central bank policy decision.