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Local Market Commentary
- Private sector conditions in Zambia improved further at the start of the final quarter of 2021. Specifically, the Stanbic/Markit PMI index rose to 51.2 in October from 50.3 in the month prior. This was the strongest reading since June 2018 and marked the second straight month the index has been above the 50-point neutral market, indicating expansion. Survey results show that output returned to growth, while sustained expansions in new orders and employment were recorded. Meanwhile, cost pressures remained muted amid favourable exchange rate movements, enabling companies to offer reductions in charges for the second month running. Confidence in the 12-month outlook for activity continued to build in October, strengthening for the third month, running to the highest since November 2019.
- The Paris Club, in a statement yesterday, said that it stands ready to proceed without delay on the request from Zambia for a debt treat-ment within a creditor committee and look forward to timely progress on the conclusion of an upper credit tranche program between the Zambian authorities and the International Monetary Fund.
- Meanwhile, speaking on the side-lines of the COP26 UN climate conference IMF Chief Kristalina Georgieva said she was “very optimistic” about reaching a lending arrangement with Zambia, one of just three countries that has sought debt restructuring under a G20 frame-work. Georgieva added that Zambian authorities had done “fantastic” work in terms of debt transparency and engaging with creditors, but more work was needed on financial assurances. According to Georgieva, “we are not yet quite there, but they are very determined,” she said. “So I’m very optimistic. (It’s) not quite yet closed, but I’m optimistic that we will have a good arrangement.”
- In the base metals complex, the price of copper has picked up sharply this morning after the global economic bellwether closed in the red yesterday. The red metal is currently marked 1.57% higher in the Asian session at the time of writing with a weaker USD and certainty around the direction of the Fed’s monetary policy trajectory supporting the price action. We are currently trading just north of $9600.00/tonne as we head into the start of the EU open.
- Meanwhile, the top copper smelters in China are tapping the export market as the historical price squeeze opens opportunities rarely af-forded Chinese smelters who can now sell refined copper at huge profits. Bloomberg reported – Some smelters met recently to discuss delivering metal to LME warehouses and to coordinate shipping logistics, said one of the people. China is the top producer and consumer of refined copper, and any exports would be just a fraction of the volume it imports. Still, the opening of the arbitrage window for the first time since April is another indication of how shortages across commodities are rewiring trade flows
- Moving over to the US, yesterday’s ADP data showed that employers added more jobs than forecast in October, increasing payrolls by 571k. This was the largest increase seen since June and comes just ahead of tonight’s FOMC meeting and this week’s NFP data release on Friday. The figures show that the US job market is recovering well as the pandemic winds down. The release supported the USD, which bounced off its intraday lows supporting the view that the Fed can taper asset purchases.
- Now focus will turn to the remaining labour market data scheduled for today and tomorrow. Today’s weekly jobless claims will be the first of the two and will likely reflect further improvement in the labour market as fewer claims are lodged on both a weekly and continuing claims basis. The payrolls data tomorrow has lost some of its significance given yesterday’s Fed announcement and decision, but holds some relevance nonetheless. Specifically, investors will monitor wage inflation for insight into how much pressure the Fed will be under to hike rates once the taper ends.
- The Fed announced yesterday that it would begin tapering its asset purchases this month, reducing its purchases by $15bn a month. Treasuries purchases will be reduced by $10bn a month, while mortgage-backed securities purchases will drop by $5bn a month. This split was widely expected. However, the Fed did note that the asset purchase programme will remain flexible and that the pace of its reduc-tion could vary depending on the economic outlook. The current outlook, however, means that the programme will end by the middle of next year, allowing for possible interest rate hikes to take place towards the end of 2022, although the Fed may look to separate its out-look for higher rates from the timing of the cessation of its QE programme. The initial market reaction was a slight weakening of the USD while front-end UST yields pared some of their intraday gains as the announcements were largely priced in.
- The USD ended yesterday’s session on the defensive. This morning, some of those losses have been recovered in Asian trade, and it may be that the expectation of stronger labour market data to come is keeping a USD bullish bid alive. Whether the USD is able to hold on to those gains is an interesting question. The BoE today will likely oblige the market with some tightening of its own, while other central banks around the world are ahead of the Fed in unwinding some monetary stimulus. Add to that the massive twin deficits that still plague the U.S. economy, and the argument for a much stronger USD should be questioned. With the clarity of the taper timeline now known, the USD may find less support given how much has been priced in.
Rand and International FX Commentary
- In financial markets, one always needs to look at the news or an event against the backdrop of what has been priced in. At face value, an event may occur which appears to favour a stronger USD-ZAR, only for the opposite to occur. It does not mean the logic or interpretation of the event was wrong, merely that the market had anticipated the event so much that it may have overpriced its reaction. Counterintui-tively, the opposite occurs. This describes to some degree what happened overnight and the market reaction to the FOMC decision to begin tapering and QE by June next year.
- The USD-ZAR corrected lower sharply after the announcement and lost a full 20 cents on the news. This despite confirmation that the Fed would remove stimulus from its policy and progress to a point where it could consider hiking rates. For the USD-ZAR, it was just as much about how much had been priced in, as it was the passing of another risk event. Couple that to the reduction in political uncertainty with the elections behind us and the USD-ZAR’s recent surge looks overdone. Technically, the pair now looks set to end the week on the de-fensive, with only the latest non-farm payrolls data to navigate tomorrow.
- However, even if non-farm payrolls data due tomorrow beat expectations to the topside, they are unlikely to impact markets significant-ly, given that their relevance is linked to the Fed’s decision making. Therefore, the market-moving importance of the payrolls data has di-minished. The ZAR now holds the potential to end the week on a firmer footing, load shedding threats notwithstanding.
- Focus through the day ahead will remain with central banks and monetary policy. The BoE will announce its decision on rates to offer fur-ther perspective, on top of the Fed’s decision last night. Some labour data in the form of the US weekly jobless claims will also hold some interest but is unlikely to impact the USD-ZAR much unless it generates a major surprise. This is not anticipated.
- Domestically, the focus is rapidly shifting towards the MTBPS next week. This is a major risk event, but given the recent government fi-nance statistics, SA’s tax position has improved considerably, and the risk of disappointment has shrunk. If anything, the outlook has im-proved and will at the margin support the ZAR.