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Zambia Market Watch – Evergrande debt crisis triggers weakness in base metals complex

September 21, 2021by Nicholas Kabaso0

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Local Market Commentary

  • In comments made during a tour of the country’s copper belt yesterday, Mines Minister Paul Kabuswe criticized the previous administra-tion’s push to liquidate Vedanta’s Konkola Copper Mines (KCM) unit, which triggered years of wrangling between the company and the government. Kabuswe was quoted as saying, “We must never, ever, bring politics in(to) the private sector…Part of the mess that we are in is because of that liquidation process.” The comments provide further evidence to suggest that President Hakainde Hichilema’s five-week-old administration will seek to roll back state involvement in the mining sector.
  • While the likes of gold have received a safe haven bid as a result of the Evergrande debt crisis, the same cannot be said for base metals. There is a cloud over the base metal counters this morning in Asia as investors price for the worst.
  • The Chinese property giant has been scrambling to pay its suppliers as it buckles under the weight of $305bn worth of liabilities, fears of contagion risks in the broader Chinese financial system are warranted however it is unlikely that the Chinese will let a default occur. The most likely outcome will probably be nationalisation given the fact that the Beijing will want to save workers interests but will not be keen to be seen supporting the rich with a “bail-out”.
  • Copper has recovered off its lows this morning. The 3m LME benchmark is currently marking time around the $9070.00/tonne level as we head into the start of the EU session.
  • Moving over to the US, the Biden administration has taken the decision to lift its travel ban on the U.K. and most of Europe, together with a list of other countries including Brazil, India, South Africa, Iran, China and Ireland. The move effectively rolls back the Trump administra-tion’s travel ban and raises the pressure on other significant economies to do the same. Vaccinations are now easily obtained, and the da-ta shows are effective against severe Covid sickness and hospitalisations. Although it is unclear how efficient the vaccines are at prevent-ing transmission, vaccinated people are less likely to impact healthcare systems and are allowed to travel. The onus is gradually being placed on adults to make their choice. It is, however, clear that those who choose to remain unvaccinated will not enjoy the same travel benefits. The move is seen as a positive step for the tourism and hospitality industries of all the countries listed.
  • Geopolitically, U.S. President Biden will meet with French President Macron to smooth the waters after France’s $40bn submarine deal with Australia was upended when Australia, the U.K. and the U.S. signed off on a trilateral defence pact. It meant that Australia cancelled its deal with France and opted for nuclear-powered submarines from the U.S. and U.K. using their technology. France sees this as a stab in the back from some of its oldest allies. The U.K. now defends its position by stating that it is a standalone country that does not need to answer to others, but it has soured relations with France and will do little for striking a cooperative tone with the E.U. In response, French President Macron has recalled French ambassadors to both Washington and Canberra in a very strong move highlighting the deterioration in relations.
  • There is not much change from yesterday, with the USD still consolidating its recent gains. Ahead of the FOMC decision and guidance on Friday, investors could well turn a little consolidative in their stance, and trading ranges could tighten. Risk aversion levels remain elevat-ed, and although not out of its normal trading range, it is trading closer to the more USD supportive part of the range. Emerging market currencies are still looking fragile, and commodity prices remain well off their best levels. The scales, for now, remain tilted towards a stronger USD, although there is a lot of Fed tapering news priced in.
  • It has been a mixed bag in terms of performance for currencies in the region on a year-to-date basis. While the Zambian Kwacha (+28.70%) and the Mozambiquan metical (+16.70%) have recorded gains and are the two best performing African currencies, with the former ranked first, the ZAR and BWP are in the red. The ZMW has rallied on the back of optimism that President Hakainde Hichilema will promptly resolve the country’s debt woes after a landslide election win. Hichilema has pledged to accelerate talks with the IMF to secure the funding needed to reduce the nation’s unsustainable debt level, and many see the incoming president’s policies as enabling the deal. Meanwhile, prudent monetary policy resulting in a high positive real rate has underpinned the MZN.

 

Rand and International FX Commentary

  • The ZAR continued yesterday from where it left off last week, securing its fifth daily decline to close above the 14.8000/$-handle, its weakest level in over three weeks. However, major and emerging currencies were broadly pressured as the USD remained supported ahead of the Fed’s policy update due Wednesday. Furthermore, a notable elevation in risk aversion has hit riskier assets and EM curren-cies. This has stemmed from Chinese property developer Evergrande’s potential inability to make upcoming debt payments, which inves-tors fear may have contagion effects should the Chinese government fail to step in. All in all, this provided a significant boost to haven currencies at the start of the week, with investors predominantly preferring the safety of the greenback.
  • Domestically, developments on the political spectrum were on newswires yesterday, with the Constitutional Court dismissing the Demo-cratic Alliance’s application to prevent the Independent Electoral Commission (IEC) from reopening candidate applications. This effectively allows the ruling ANC to participate in the upcoming municipal elections and reregister candidates in over 90 municipalities after failing to meet the initial deadline. While markets were unreactive to the decision yesterday, it ultimately raises serious questions over the IEC’s independence and could increase political risks associated with investment into SA in the future. The ZAR, which has retained a great deal of resilience over the past year in part due to SA’s relatively higher yields on offer, will likely bear the brunt of growing political pessimism in the medium to longer term. 
  • In the near term, while the ZAR still has limited potential for upside in the coming sessions, its decline has taken a breather in early morn-ing trade today. The USD has incurred a slight dip overnight, while the ZAR’s higher sensitivity to swings in global sentiment has seen the unit reverse almost all of yesterday’s losses at the time of writing. However, traders still see near term volatility as likely for the USDZAR. Recall, one-week implied volatilities, which represent the cost of hedging fluctuations of the currency pair, have spiked on account of cen-tral bank meetings both domestically and stateside. However, as of yesterday, both one-month and three-month volatilities have jumped to their highest since April, suggesting the outcomes of this week’s central bank meeting may spark some exchange rate volatility further out. 
  • As for the day ahead, the domestic data card kicks off with the SARB’s leading indicator, with expectations that the indicator will have fall-en in July given the civil unrest which disrupted supply chains and economic activity. Externally, despite not holding onto yesterday’s gains, the USD remains supported near one-month highs. Given Chinese markets remain closed for holidays until tomorrow, we will un-likely see a large change to the market’s current risk aversion. As such, emerging market currencies such as the ZAR should remain vul-nerable in the session ahead.

Nicholas Kabaso

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