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Local Market Commentary
- Yesterday, Mines and Minerals Minister Paul Kabuswe told lawmakers that Zambia wants to renegotiate a deal to buy Glencore’s Mopani Copper Mines. According to Kabuswe, “the deal that Glencore signed when they were exiting, I think to me it’s a scandal. You cannot sign deals like that. It’s unacceptable to us. We are working it out and we are still renegotiating.” Kabuswe added that he already engaged Mopani’s CEO. Recall Zambia took on $1.5bn in debt to buy Mopani from Glencore GLEN.L in January and is yet to find a new investor for it. Meanwhile, the minister also said that that the government had been reviewing the mining tax framework with key stakeholders to design a regime that would be stable, predictable, and competitive. The revised framework is expected to “attract both local and foreign investment in mining and ultimately scale up mineral production in the country”, according to Kabuswe.
- Meanwhile, Finance Minister Situmbeko Musokotwane speaking in parliament, said that Zambia will implement policies to make its debt sustainable that talks with the International Monetary Fund had moved quickly since a new government took over in August. According to the minister, “the government and the IMF are reviewing a set of policies that will restore economic growth, create jobs, protect liveli-hoods and support the social sector. The policies that will be agreed upon with the IMF will also aim at restoring fiscal fitness and attaining debt sustainability.” Musokotwane added that policy adjustments agreed with the IMF would be announced once discussions over the lending programme were over.
- Copper prices came under further pressure on Wed on expectations that difficulties in China’s property sector will add further headwinds to demand. Already, investors have expressed concern about China’s business cycle and the slowdown evident in the recent PMI data. That was before the Evergrande saga unfolded, raising the risk of yet another impact on broader demand. Add to that the power curbs in China, and investors have little choice but to price in a slowdown. Copper remains in the spotlight through developments in Peru where the local community in Espinar province has blockaded a key mining road that will continue indefinitely. The protest is against the government and Glencore’s Antapaccay copper mine. This time, the protest is against the environmental and social impact of the mine as well as the lack of engagement the community received before authorisa-tions were granted. The community has reiterated that it will not stop the blockade until all demands are met, many of them related to the environmental degradation that the mine will generate.
- Moving over to the US, yesterday’s ADP data came as a pleasant surprise. It showed what many had been anticipating for months, name-ly a strong recovery in the labour market. It also ensures that investors see the soft patch in the labour market as temporary and has raised expectations for the jobless claims data due today and the payrolls data expected on Friday. There is a very clear improvement in the labour data as a trend, although recently, the momentum has slowed. However, with the number of infections subsiding and coun-tries worldwide opening up, albeit gradually, momentum could improve once more. A strong payrolls number on Friday will almost cer-tainly seal the deal for the taper to start in Nov.
- Senate Republicans have agreed to work with Democrats to offer them a short-term rise in the debt ceiling along very tight and strict timelines and amounts. Expectations are that the short-term rise will pass to reduce the risk of a default and offer the Democrats more time to use the reconciliation option to suspend the debt ceiling or raise it on their own. The Republicans have been clear that the Demo-crats must take full responsibility for their objective of passing some very large spending programmes that will require taxes to be lifted and could stifle the private sector growth dynamic in the process. Stocks ended higher on the news, and a more risk-on tone has re-entered markets.
- In more good news, China and the U.S. have committed to holding a virtual summit before the end of the year. After some early negotia-tions to improve relations between the two countries, the two presidents will meet to hold frank and candid discussions on various is-sues. Relations, for now, remain frosty, but this is a step in the right direction, although the issue of trade relations will likely make it onto the agenda, with the U.S. still running a massive $30bn per month deficit with China. Nonetheless, it will help reduce risk perceptions.
- In the FX markets, the ZMW was little-changed yesterday. Meanwhile, the USD finds itself in limbo territory after the stronger than antic-ipated ADP data yesterday and ahead of the payrolls numbers tomorrow. It is torn between an improving economic outlook that would justify the taper and the reduction in risk aversion that might prompt a shift from the USD. Furthermore, U.S. Treasuries appear to be on hold and reducing the potential for any directional bias. It seems highly probable that the USD will continue to consolidate ahead of the data tomorrow and only adopt definitive direction thereafter. Following the ADP data yesterday, investors will, however, be expecting payrolls to be strong.
Rand and International FX Commentary
- The ZAR traded weaker alongside most emerging market currencies yesterday as the USD continued its rebound, once again testing one-year trade-weighted highs reached last week. With markets looking to official US labour data due tomorrow, risk aversion is expected to drive more cautious trading conditions into the end of the week. However, given the USD’s lofty levels at present, a significantly poor reading for nonfarm payrolls tomorrow holds the potential for the greenback to see a correction, albeit likely not too substantial.
- If yesterday’s private payrolls data is anything to go by, though, September will likely see more solid hiring dynamics, with further slack being taken up in the jobs market bolstering bets that the Fed will announce a tapering of stimulus before year-end. Specifically, ADP employment change data showed that 568k private sector jobs were added in September, up from 374k in August and beating consensus expectations of analysts surveyed by Bloomberg for a 430k rise.
- Should the nonfarm payrolls print also surprise to the upside tomorrow, this will be yet another tailwind for the USD, which has already been drawing support from higher Treasury yields as rising global energy prices have added to inflationary concerns. Rising global energy prices have recently been driving inflation expectations, with dual concerns that it will impede global growth and simultaneously force de-veloped nations to act sooner in withdrawing monetary stimulus. As a result, overall market sentiment was enough to overpower some ZAR-positive hawkish comments from the SARB in the previous session. While the ZAR could gain some support from SARB willingness to fast-track rate hikes, given the weak domestic economic backdrop, the likelihood remains low. As for trade yesterday, the USD-ZAR surged ahead, testing the 15.2000 before pulling back in afternoon trade to end 0.60% higher, just shy of 15.1000.
- In the wake of initial global lockdowns in 2020, South Africa’s robust terms of trade have been a pillar of resilience for the ZAR. However, with global inflation seeing greater risk of sooner policy tightening in developed nations and growth risks becoming evident in China, SA’s largest trading partner, the strong external position is likely to erode as we move forward. Ultimately, the domestic economy remains subdued by inherent structural constraints which have inhibited growth in recent years. Furthermore, SA would still be in a fiscally fragile position once the commodity cycle begins to wane and if government has been unable to rein in expenditure sufficiently.
- As for the day ahead, there appear to be signs of returning risk appetite. EM currencies have recouped some of yesterday’s losses over-night, with the ZAR leading riskier currencies this morning, while equity benchmarks have traded in the green during the Asian trading session thus far. However, the USD has held steady on a trade-weighted basis, suggesting the market remains cautious ahead of the offi-cial September jobs report due tomorrow.