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Local Market Commentary
- As the civil unrest in Ethiopia worsens, President Hakainde Hichilema yesterday ordered Zambians who live and work in Ethiopia to return to Zambia. Hichilema also asked the African Union and the United Nations to work with Ethiopian Authorities to quickly address the volatile situa-tion in the country, saying his government remained fully engaged in the matter as a conflict-free Africa was good for everyone. Meanwhile, outgoing ambassador to Ethiopia and Permanent Representative to the AU Emmanuel Mwamba said that “we started the evacuation with our female diplomats and non-essential staff last week. We still have a skeleton staff to man the mission and also to arrange for any other even-tualities.”
- Copper prices are steady this morning in the Asian session with the benchmark 3m LME contract trading around $9535.00/tonne as we head into the EU open. The copper desks are in limbo preferring the comfort of the fence ahead of the all-important US CPI reading later today.
- Meanwhile, the Trafigura group, the world’s largest copper trader is predicting a period of softness for the red metal which will potentially provide some relief for the market which has seen a squeeze in available near term supplies. Bloomberg reported – Trafigura’s chief economist Saad Rahim made the comments on a call with investment bank Jefferies, according to an analyst note summarizing it. “Saad expects power constraints and the housing market slowdown to lead to weaker Chinese demand for copper and other metals between now and Feb 2022, which is when Chinese New Year and the Beijing Winter Olympics will take place,” according to the note.
- Moving over to the US, most of the focus at the moment is on economic data, but it is worth noting that President Biden will hold a virtual meeting with Chinese leader Xi Jinping, possibly as early as next week. In principle, the two agreed to hold a virtual meeting before the end of the year, and the underlying hope is that this dialogue starts to ease tensions between the two nations. Without direct relations between the two leaders, the risk is that the tensions escalate towards conflict between the two superpowers, something no one wants.
- After steadying in Q3, U.S. inflation is expected to have surged higher to 5.8% at the start of Q4 amidst persistent global supply constraints and rising energy costs. While the headline figure has remained buoyed, the major risk to the economic recovery has always been its uneven na-ture, where various sectors remain subdued despite robust recoveries in others. In the last CPI data, prices for the travel and leisure sector fared poorly in comparison, with airline and hotel fares declining in September to reflect the impact of the delta COVID-19 variant. While pres-sure from elevated headline inflation has seen the Fed recently announce a taper of its monthly asset purchases, the outlook for interest rate hikes in early 2022 remains unlikely. Fed officials maintain that elevated inflation will be temporary and will ease with the normalisation of global supply chains.
- Although U.S. monthly budget deficits have improved since the worst of the pandemic, the country is still running on a massive shortfall, with the cumulative deficit for the fiscal year 2021 at over $2.7trn. Given all the promises being made by the current administration, we could ex-pect to see another year of spending far outpacing revenue, even if not all of the proposed stimulus and investment packages get approved in their current form. Expectations of this were evident in the latest refunding announcements, which showed a much smaller cut to Treasury is-suance than was expected. These deficits may not be a worry right now, but longer-term will place some pressure on the USD, especially given the U.S.’s massive trade deficit, which we also expect to widen over the months ahead.
- In the FX markets, ahead of the U.S. inflation data later today, the USD appears to have stabilised. The risk is that inflation surprises to the topside and prompts speculation that the Fed may bring forward any timing of a rate hike. Following on from the sharp jump in producer prices in China to a 26 year high, and inflation is a definite concern for investors. It will likely detract from household disposable income and will be growth negative. Equity markets have come under pressure, and overall risk aversion levels are a little higher this morning. EM currencies are on the defensive, and the USD will likely hold its station until the data is released.
- Meanwhile, a broader broader bearish bias remains entrenched on the Zambian Kwacha at present. For context, the ZMW is down by -1.02% on a month-to-date basis and is the worst-performing African currency as demand for hard currency continues to outpace supply. These losses follow on from October losses of 2.75%, which saw the ZMW rank as the 2nd worst-performing currency against the USD, according to 23 Afri-can countries tracked by Bloomberg.
Rand and International FX Commentary
- After an impressive performance last week and Monday, Tuesday brought with it a reversal of fortunes for the ZAR. The market was quick to unwind overpriced expectations for Fed normalisation and is now turning back to the upcoming CPI data out of the US. The risk is that the data reflects a higher inflation print than anticipated, and the market looks to bring forward the timing of a rate hike. Once again, the market appears to be pricing in an expectation ahead of time. Market talk suggests that a print above 0.8% m/m could help the USD break out the topside of its current range.
- This comes as China’s inflation data comes out to the topside, and investors more broadly are fretting about the negative impact that such a strong global inflation episode will have on growth. Stock markets are a sea of red this morning, and overall levels of risk aversion have jumped higher. Not to the point of distress, but enough to nudge emerging markets onto the back foot and re-establish a bit of USD su-premacy.
- The rally in the USD has helped nudge commodity prices lower, which is a double whammy for the ZAR, and since yesterday it has had a much tougher time. But US CPI will be released this afternoon, and the market response will determine the ultimate direction. By the end of the day, it will be another important risk event that has passed, with the MTBPS looming on Thursday.
- At least some of the ZAR’s retreat is also related to position squaring ahead of the medium-term budget. Although it is likely to be a rela-tively upbeat budget update compared to Feb, it holds significant risk. The current Eskom woes highlight South Africa’s challenges in a nutshell. Maladministration, cadre deployment, lack of service delivery and maintenance have caught up, and with Eskom’s energy avail-ability factor dipping below 50% in the past week, it has turned into a full-blown crisis that will remain intact for many years to come. Load-shedding has almost always influenced the performance of the ZAR, if not through direct depreciation, then through limiting appreciation. For now, all eyes turn to US CPI and the MTBPS tomorrow.