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Local Market Commentary
- With the domestic quiet in the session ahead, attention will rest on external developments. Aside from the FOMC meeting today, Zambi-an attention may also rest with President Hakainde Hichilema’s keynote speech to the 76th Session of the United Nations General As-sembly in New York. The President in his address, is expected to focus on a wide range of issues affecting Zambia and the globe while seeking possible interventions.
- Meanwhile, Mopani Copper mine is forecast to record a profit of $52mn at the end of the 2021 financial year, according to Mines Minister Paul Kabuswe. Moreover, the minister said that government will soon make a policy statement on the direction of Mopani in terms of its ownership.
- In the base metals complex, Copper closed below the $9000.00/tonne mark overnight however bargain hunters have been noted buyers of the red metal in Asia this morning taking the benchmark 3m LME copper price through the $9200.00/tonne mark.
- Analysts have downplayed the Evergrande troubles of becoming China’s “Lehman moment” and there has been sighs of relief as the property developers unit Hengda Real Estate Group stated it would meet a bond interest payment on the 23rd September 2021.
- Moving over to the US, although the bulk of the focus today will be on monetary policy and the guidance the Fed offers the market on tapering, there is also much attention on fiscal matters. The Democrats passed a bill through the House of Representatives to keep the government funded through to the 3rd Dec and suspend the debt ceiling until the end of 2022. Now it will shift across to the Senate where the Republicans will block it and force the Democrats to use their majority once more. The Republicans will not want to be a party to this decision ahead of Congressional elections that take place next year. These events are, however, instructive. The Democrats are willing to force through the bill to avoid any further undue stress in financial markets and keep confidence buoyant.
- Undoubtedly, the most significant event this week for financial markets is the FOMC rate announcement. While the actual rate decision is a foregone conclusion, the policy statement and rhetoric used by policymakers hold the potential to result in some significant price action and will likely determine near term directionality for financial markets the world over. Traders will scrutinise the policy statement for indi-cations of how soon the Fed will start to taper stimulus. Traders will also seek clarity on eventual interest rate hikes. Until the statement is out and traders have digested it, we expect markets to remain in limbo. A hawkish statement should provide a boost to the dollar and a headwind for EM FX. The opposite also holds true.
- In other news, the US will donate an additional 500mn Covid-19 vaccines, raising the amount it has distributed to over 1bn. This comes on top of the 500mn doses already purchased from Pfizer BioNTech that were distributed through COVAX. The move is an attempt to deflect attention from the disparity that exists between developed, well-vaccinated countries and poorer, less-resourced countries that do not have enough vaccines for any meaningful progress to be made.
- In the FX markets, a mild weakening bias remains entrenched on the Zambian Kwacha at present. Meanwhile, ahead of the FOMC deci-sion later and the guidance the Fed offers on the timeline of tapering, the USD is treading water. Although it has refrained from retreating to any significant degree, it is not showing signs of wanting to rally much further either. The Fed’s guidance will be key to direction through the trading sessions ahead. Technically, the USD is looking a touch overbought in the near term, while fundamentally, there is a lot of taper talk priced in. The risk is skewed towards the Fed pushing out the timing of a taper rather than bringing it forward, implying that the USD may be vulnerable.
Rand and International FX Commentary
- Despite clear signs of recovering sentiment, with global equity markets generally trading in the green and the US dollar coming under mild pressure, the ZAR snapped the broader turn in market sentiment yesterday. The local unit had traded firmer in earlier trade but swung gains throughout the domestic trading session as investors continued to see vulnerability for the ZAR ahead of a domestic monetary poli-cy update from the SARB due tomorrow, in addition to the US Fed FOMC policy decision today. Furthermore, USDZAR implied volatilities have remained elevated as traders continue to expect and price in a higher degree of risk associated with hedging against ZAR weakness in the near term.
- Despite the weaker USD, the ZAR swung intraday gains of over 1%, ultimately closing flat around 14.8250/$. Meanwhile, the effects of Ju-ly’s civil unrest coupled with sustained harsher lockdown restrictions was seen in the SARB’s leading indicator yesterday. The gauge, which signals probable future economic output, came in at a five-month low of 122 and was the second consecutive monthly decline. Ac-cording to the SARB report, nine of the ten available component time series decreased in July while one increased. The largest detractors were decelerations in the six-month smoothed growth rate of job advertisement space and in the number of new passenger vehicles sold. Beyond the July events, we can expect to see the leading indicator remain under pressure as the growth outlook remains weak amid many challenges with expectations of only a gradual economic recovery.
- Furthermore, on the domestic front, comments from ratings agency Fitch yesterday highlighted that despite recent positive revisions to 2021 growth estimates, it is unlikely to change the trajectory of growing public debt. Weak economic performance further out will contin-ue to reduce tax revenue potential while government struggles to rein in expenditure amid social pressure to support the vast number of unemployed. While Fitch noted improvement of SA’s debt to GDP ratio to 79.3% from 82.5%, it remains well above the median for ‘BB’-rated sovereigns of 59%. This ultimately speaks to the ZAR’s sensitivity to broader market moves, given the weak domestic economy and limited protection from global business cycle fluctuations and changes to risk appetite.
- Over to the spot markets, sentiment has been mixed in the early morning Asian session, with liquidity returning as Chinese markets re-sume trade after a long weekend. Despite overnight announcements from Chinese property developer Evergrande that it would make its anticipated coupon payment due tomorrow, allaying fears of potential spillover effects for the global economy in the case of default, Chi-nese equity markets are nevertheless playing catch up with the recent market rout. Emerging market currencies have traded broadly weaker while the USD has firmed mildly in early trade, with investors generally favouring the greenback ahead of the Fed’s policy an-nouncement later today. Domestically, markets will turn to August’s inflation print due later this morning which, despite expectations for an uptick to 4.9% from 4.6%, will unlikely cause too much concern for the SARB at the moment.