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Local Market Commentary
- In its Q2 economic report released yesterday, Zambia’s finance ministry reported that the country’s arrears for external debt principal and interest payments increased to $1.48bn by June 30 from $841mn at the end of December. The government’s stock of verified domes-tic arrears, excluding value-added tax refunds and salaries, rose 27% to $ 30.6bn kwacha in Q1, with the increase mainly due to capital and road project-related arrears. Meanwhile, Zambia’s external debt rose to 1.3% to $12.9bn in the six months through to June and was on account of continued disbursements for some priority projects. Zooming in on budget dynamics, revenue and grants in the first half of 2021 estimated at ZMW 50.7bn, beating the budget target by 46% while spending including amortization was 11.4% above target at ZMW 64.3bn. Meanwhile, the finance ministry lowered its growth forecast estimate from 1.8% to 1.6% for this year.
- Copper closed lower yesterday following the inking of several agreements in Chile surrounding wage disputes which lowers the risk of supply disruptions from the world’s largest exporter of copper. The 3m LME price finished some 1.4% lower on the session and is current-ly around 0.3% down on the day changing hands at $9534.50/tonne as we head into the EU open.
- The big outperformer for the moment remains aluminium which topped $3000/tonne yesterday. Granted the metal finished down on the day but there are massive concerns brewing as to the availability of the metal given the coup in Guinea and the output curbs enacted by Beijing.
- Looking at the day ahead much will depend on the US inflation release which will adjust the outlook on the timing for the US taper which has underpinned much of the rise in base metals as the world regroups following the hard lockdowns related to COVID-19.
- Staying with the US, today’s inflation data is arguably the most important data event of the week. It is a major consideration for the Fed and will therefore hold market-moving potential. Consumer inflation in the U.S. is expected to have moderated slightly from the surge seen in July. Price pressures within reopening-sensitive sectors are easing as the economy is slowly normalising, but certain categories such as used vehicles and rents will keep the headline elevated over the next few months. Given the sensitivity of global markets to infla-tion at the moment, any surprises in the data will be market moving. A miss will increase bets that the Fed will delay the tapering of its bond-buying programme, while conversely, any higher than expected numbers will see bets increase that tapering will happen before the end of this year.
- While the inflation data holds consequences for monetary policy, fiscal policy is set to change significantly as well. The Democrat-controlled Congress will be seeking to roll back the Trump tax breaks in a bid to raise the funding needed to pay for the massive infra-structural spending programme that the Biden administration wishes to embark on. Democrats currently feel emboldened by their major-ity in the House and the ability to force through changes in the Senate and will utilise the pandemic as the justification for the government needing to do more. Increasingly, more socialist principles are being adopted, which comes attached to higher overheads that will need to be funded perpetually. The Republicans will challenge these views and policies were possible but are limited in the degree of resilience they can offer.
- Politically, the Biden administration came under scrutiny and criticism when Secretary of State Blinken testified before a congressional hearing, where two Republicans even called for his resignation. Blinken repeatedly pointed out that former President Trump was the one to make the original agreement they honoured. The Afghan army was the main culprit behind the quick and dramatic capitulation that al-lowed the Taliban to take control. It has become a P.R. nightmare for the Biden administration and the Democrats and has impacted them heavily in the opinion polls.
- In the FX markets, the Zambian Kwacha was marginally weaker at the start of the week, moving further north of the 16.200 mark. How-ever, note that the local unit is expected to post some gains against the greenback this week, supported by corporate firms selling hard currency in preparation for tax payments. Meanwhile, not much change to the USD that continued to trade in a tight range ahead of to-day’s CPI reading. Directional momentum is weak, and a fresh catalyst is needed. Equity markets are a little stronger today, and risk aver-sion has subsided, which has dampened some of the bid for USDs. Technical indicators are not favouring much direction either, leaving in-vestors on the sidelines until the CPI data is released to offer something to trade on.
Rand and International FX Commentary
- Risk appetite kicked off the week on a tetchy note, with the USD remaining on the front foot for most of the domestic trading session. However, a late afternoon pullback saw the USD trade-weighted index (DXY) pare gains on the day as FX markets struggled for clear cut direction. The ZAR, meanwhile, snapped broader market moves as it gained amongst only a handful of emerging market currencies yes-terday. The local unit was up amongst commodity currencies, ultimately gaining 0.35% for the first trading session of the week to close at 14.1600/$.
- As for broader emerging market sentiment in recent weeks, risk appetite has remained largely supportive. Given the ZAR’s sensitivity to risk dynamics, it is unsurprising that it has shot to the top spot in recent weeks as investors have continued to pour into EM asset classes. According to data compiled by Bloomberg, US-listed emerging market ETFs recorded inflows for the third straight week last week. This ul-timately speaks to the outlook for US monetary conditions and the potential risks to Fed asset purchase tapering or overall tightening of monetary policy. With interest rates set to remain low for some time still, investors will continue to favour EM asset classes over tradi-tional, safer stateside options, which will continue to contribute to downside pressure on the USD in the short to medium term. Addition-ally, the prospect of higher taxes amongst developed nations, especially in the US, will likely stoke the bias towards EM asset exposure. As for ETFs which purchase SA assets, these recorded inflows of $7.2 million, of which $6.3 million were equity inflows and the remainder into funds that purchase domestic bonds.
- As for the day ahead, delayed mining production data for both June and July will finally be released. Given last week’s Q2 GDP release used estimates for June’s mining output, this may be the source of some revision to second quarter growth estimates. However, these figures are extremely dated, which will remove most significance, especially given the social tensions which followed. The July figures, meanwhile, will provide further evidence into the impact of the civil unrest in the country, although the sector should have escaped large-ly unscathed.
- Externally, most focus will be drawn to the US’ August inflation print later today, which is expected to have remained above 5% y/y for the fourth consecutive month. Investors will be gauging how heightened inflation will be debated amongst Fed officials and, with the Fed’s September FOMC meeting due next week, this holds significant market-moving potential. In the spot markets currently, however, EM currencies have traded broadly in the green during early Asian trading hours. The USD has held a narrow range, however, with the market likely gearing up for potential turbulence in the event of a shock inflation print.