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Local Market Commentary
- In response to a study by the China Africa Research Initiative on Tuesday, Zambia’s finance ministry said that the government’s official re-porting on public debt is “broadly consistent” with figures reported in the study. The finance ministry added that Zambia’s reporting on public debt is fully accurate and transparent and that key creditors and stakeholders, including the International Monetary Fund, have re-ceived more detailed data on the makeup of public debt.
- Meanwhile, Zambia’s money-laundering authority yesterday said that state-appointed provisional liquidator of Konkola Copper Mines (KCM), Milingo Lungu, had been arrested and charged with laundering more than $2mn. According to the Drug Enforcement Commission, which handles such cases, “the money is said to have come into his possession by virtue of being the provisional liquidator for Konkola Copper Mines Plc.” Lungu, in response called the allegations levelled by the commission “baseless and untrue” and said, “I welcome the opportunity to clear my name in Court.” The commission alleged that Lungu, acting with others, “did engage in theft” involving ZMW 110.4mn and $250,000 between May 22, 2019, and Aug. 15, 2021, and “obtained money by false pretences” amounting to $2.2mn. Lungu has been released on a police bond and is set to appear in court soon.
- Investors in Zambia will today contend with the September CPI report and August trade balance stats. Inflation is expected to decelerate at a quicker pace and move towards the Bank of Zambia’s target range, mainly on account of the favourable outlook for the exchange rate and improved prospects for fiscal consolidation. A sustained slowdown in inflation will ease policymakers’ pressure to normalize monetary policy settings.
- Copper is set for its first quarterly loss in six quarters driven by the taper which is the US Fed scaling back on its bond purchases. The mar-ket views this as a potential catalyst for lower economic growth as the wall of money that hits the streets on a monthly basis is scaled back.
- The benchmark 3m LME contract is currently marked at 2.1% down on the quarter and is currently quoted at $9168/tonne going into the start of the EU session.
- China remains the central pivot for most base metal products and as such any data that is released from the economic powerhouse is watched closely. The official PMI number for September dipped below the 50 mark which denotes expansion coming in at 49.6, a Reuters poll had the index coming out at 50.1. The sub-index for factory output dipped below 50 for the first time since February 2020, with high energy usage industries faring the worst as Beijing cracked down on pollution and consumption.
- Moving over to the US and today is an important day in the US Congress. A bill must be passed to extend or lift the debt ceiling or the Federal government will face the prospect of a shutdown once again. There are many moving parts to the equation on why this has not happened yet. Biden’s enormous spending initiatives are at the centre of it all, which Republicans will not support. Not only would they come attached to tax hikes, but they potentially load an enormous amount of debt on to the state balance sheet without the commensu-rate rise in GDP. The Republicans have therefore shifted the burden of passing these bills across to the Democrats. However, the Demo-crats themselves are divided on the size of that bill. All sides are now using what leverage they have to engineer a middle ground com-promise, but while they do that, the Federal government funding runs dry. Should today’s efforts fail, the U.S. will be staring at another government shutdown that will do little to bolster confidence or support the economic upswing.
- At a European Central Bankers Forum, Fed Chairman Powell was quoted as saying that logistics that have hampered supply chains will re-main with us for a while. He indicated that there were no clear signs that the supply chain constraints were easing and pushed out expec-tations of when this might happen. The take-home point was the supply side inflation dynamics could persist for longer than anticipated, which could keep inflation elevated for a while longer. It may force the Fed and other central banks to try and quell inflation expectations in the midst of a patchy and sensitive economic recovery.
- Yesterday the USD surged on increased speculation that the Fed would soon taper, that inflation would remain higher for longer, and de-velopments around Evergrande that may have missed another interest payment. Although equity markets are not in wholesale selling mode, there is no question that risk aversion is elevated. US Treasury yields retreated slightly yesterday but remain elevated. Investors are likely to favour some rotation towards the safety of the USD.
- The month of September thus far has been a difficult one for most African currencies against the USD. When looking at Bloomberg’s bas-ket of 23 African currencies versus the dollar, we see that 14 currencies have traded on the back foot on a month-to-date basis. Aside from idiosyncratic developments, a firmer dollar buoyed by surging UST as investors price in a potential November start to asset purchase tapering and potentially stickier inflation than originally expected as well as slowing growth in China are some of the factors that have dented sentiment and weighed on currencies in the region.
- The worst performing currencies on the month so far have been the Zambian Kwacha (-4.77%) and the South African Rand (-4.33%). The former has erased some of August’s huge gains, which were driven by optimism that the Hichilema administration will be able to put the country back on a sustainable debt trajectory. Despite the losses, the ZMW, however, remains Africa’s best-performing currency on a year-to-date basis. The latter, meanwhile, has faced further downside pressure from weak economic data and a more pessimistic eco-nomic outlook for the country. Looking ahead, with global risks intensifying and the dollar regaining lost ground, the near term outlook for African currencies as a whole is bearish.
Rand and International FX Commentary
- Despite some notable ZAR strength earlier in the day, as the local unit attempted to test the 15.0000/$-level from the topside, this was ul-timately shortlived with FX markets remaining firmly in favour of the US dollar. Despite edging slightly lower yesterday, US Treasury yields have remained buoyed, with the 10-year benchmark yield still near its highest levels in three months. This has kept the USD on the front foot in recent trading sessions, while yesterday’s significant jump saw the trade-weighted dollar index (DXY) break the 94.00-level for the first time since early November 2020. As such, the ZAR swung earlier gains in afternoon trade, closing 0.45% weaker and just shy of the 15.2000/$-handle.
- While the ZAR retreated in line with the EM currency sample, domestic sentiment was also weighed down as President Ramaphosa’s cur-rent battle against corruption took a knock. Yesterday, President Ramaphosa authorised the release of the Special Investigating Unit’s (SIU) report into an R150 million contract awarded by the Health Ministry during the COVID-19 pandemic to close associates of then Health Minister Zweli Mkhize. The report ultimately found Mkhize’s conduct unlawful and the tender, which led to wasteful expenditure of as much as R80 million, fraudulent. With upcoming municipal elections at the start of November, these findings are yet another blow to the President’s pledge to root out graft within the ruling party.
- In FX markets at present, though, the major uncertainty remains with slowing global growth prospects, notably in China, and, at the same time, the imminent tapering of Fed asset purchases. The latter should continue to boost the USD through higher Treasury yields, while South Africa’s trade exposure to China is currently compounding pressure on the ZAR. As such, USDZAR near-dated implied volatilities remain elevated, with traders pricing in a higher premium to hedge short term ZAR volatility. This is likely to remain the case as we head into the end of the week, with the data card heating up both domestically and internationally. This morning, official and independent Chi-nese PMI readings have offered conflicting views, with the former showing factory activity shrank in September due to curbs on electrici-ty usage and elevated input prices, while the independent Caixin PMI showed activity remained steady at the 50-neutral mark.
- While Asian equity markets have traded broadly higher this morning, emerging markets have been more mixed given heightened uncer-tainty surrounding the global economic and monetary outlook at present. Domestically, it is a bumper data card for the day ahead, with private sector credit growth, money supply growth and producer price inflation scheduled for this morning, followed by government budget and trade balance data due in the afternoon. Externally, a final Q2 reading for US GDP and initial jobless claims will hold focus, while a slew of Fed speakers later today will continue to offer hints of Fed insights into risks that US inflation will be stickier than ex-pected.