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Local Market Commentary
- Upon completion of the International Monetary Fund’s week-long technical mission, the first to Zambia since opposition leader Hakainde Hichilema came into power, the IMF said that Zambia needs to quickly restore macroeconomic, fiscal, and debt stability. This comes as the Zambian government prepares a budget that will be crucial for planned talks on reorganizing the country’s sovereign debt. Recall Zambia, which in November became Africa’s first pandemic-era sovereign defaulter when it missed an interest payment on one of its $3bn worth of Eurobonds, wants to strike a deal with the IMF that could also unlock a $1.3 billion interest-free loan.
- In a statement yesterday, Zambia Mission Chief Allision Holland said that “in light of the deeply challenging macro-economic environment that prevails, the new administration faces an urgent need to take steps to restore sustainability while protecting the vulnerable and cre-ating more inclusive growth. We look forward to discussions on a fund-supported program in the near future.”
- The September edition of Zambia’s Markit/Stanbic PMI print is due today. Recall in August, Zambia’s Markit/Stanbic PMI ticked higher, coming at a 4-month high of 49.8 from 49.4 in the month prior. While the PMI index remained below the 50-point neutral market, sug-gesting private sector conditions remain difficult, the recent appreciation of the Kwacha and easing of inflationary pressures is seen as po-tentially improving conditions in the coming months.
- News out of Chile is that copper production fell in August, with the strike at state-owned Codelco one of the key reasons for this. BHP’s Escondida also reported a 14% y/y drop in production through August, after the miner curtailed some of its production due to the Covid-19 pandemic resulting in 13 consecutive months of declining production. The same affliction has affected Collahuasi copper mine, which reported a 19.7% y/y decline.
- Moving over to the US, political grandstanding appears to be the order of the day concerning the debt ceiling. Once again the U.S. Con-gress finds itself divided on how best to raise the ceiling. Doing so will remove concerns that the U.S. is at risk of defaulting on its debt. However, the Republicans want nothing to do with the Democrats’ spending programmes and do not want to be seen as facilitating these enormous spending bills without highlighting their resistance. The Democrats have more options they may be forced to use and “own” the decisions to increase the debt ceiling and try to pass their enormous spending bills. No doubt, the Republicans will want to argue that the accumulation of debt and wasteful expenditure was all a function of the Democrats propensity to spend.
- In the way of economic data, some strong factory orders data was released yesterday, which alluded to some underlying momentum in the U.S. economic recovery. Had it not been for supply and logistics constraints, the data might’ve been even stronger. The outcome, which reflected growth of 1.2% m/m for August, only strengthens the argument for the Fed to begin tapering, with some underlying resil-ience and sustainability now evident.
- Shifting to the FX markets, at the start of the new week and ahead of payrolls data later this week, a risk-off environment evident in the equity markets has helped support the USD. Specifically, investors are concerned about the risk of stagflation, given the slowing growth in China and other Asian countries while inflation and input costs remain extremely high. The inflation spike will prove temporary across most jurisdictions, but the risk is that it stays elevated enough to warrant the central banks taking action to prevent a sustained rise in in-flation expectations.
- Locally, kwacha bears remained in control yesterday as the local unit closed on the back foot, moving further north of 16.800. The Kwacha remains under pressure as demand for hard currency stays higher than supply.
Rand and International FX Commentary
- The prospect of US Fed policy tightening remains at the front of investors’ concerns, and which kept emerging market currencies on their toes yesterday. In comparison to major currencies, riskier currencies traded with less buoyancy against the USD, with the ZAR falling 1.15% yesterday as it led the EM sample lower alongside other commodity exposed currencies. However, the USD was broadly pressured yesterday despite an uptick in us Treasury yields on the day, suggesting market participants may see the greenback’s late September rally as overdone.
- Adding to souring sentiment, Moody’s said in a note yesterday that SA’s credit risks remain elevated given the fragility of the domestic economic recovery due to low vaccinations levels and governance shortcomings that have created financial and solvency pressures at public-sector organisations. The rating agency also sees the government being able to provide only limited support as it remains con-strained by its rising debt burden. While it seems government remains committed to fiscal consolidation, support packages to ease social pressures as seen recently pose a significant challenge. Moody’s sees a high risk that sovereign debt continues to grow, limiting the gov-ernment’s ability to provide support to public sector entities.
- As for the broader economy, the standard bank PMI to be released later this morning will provide an update on the ongoing recovery. Recall the so-called economy-wide PMI slipped back below the 50-mark, separating expansion from contraction, In July for the first time since September 2020 as social unrest and riots took their toll on the private sector. While the August recovery is expected to have fol-lowed through in September, it will be unlikely that the gauge will return to levels seen in Q2 owing to more challenging global economic conditions. Additionally, local issues remain prevalent such as depressed business and consumer confidence, weak domestic demand, in-creased slack in the labour market, depressed credit growth and the absence of structural reforms, all of which continue to pose down-side risks to the private sector.
- Over to the spot markets, overnight losses on Wall Street have led to a sour start to the day in early Asian trade. The ZAR has tracked emerging market currencies weaker, while the USD appears to be on a firmer footing after its three-day slide off one-year highs. While Asian equity markets and emerging market currencies have traded broadly in the red, given Chinese markets remain closed for holidays, current liquidity-thinned trade may not give an appropriate indication of sentiment for the day ahead. Domestic markets will also have the SARB’s bi-annual monetary policy review due later today, which will be watched for clues on the trajectory of interest rates going forward. Externally, final readings for September services PMIs from across the globe will hold focus in the day ahead. However, markets may let these pass by in anticipation of US private payrolls data due tomorrow and official non-farm payrolls due Friday, which could stoke some market volatility later in the week.