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Local Market Commentary
- The big news on the political front is that Zambian opposition leader Hakainde Hichilema secured a shock landslide victory in the presiden-tial election. The results were announced by the Electoral Commission of Zambia’s Chairman Esau Chulu at a briefing early this morning in Lusaka. The official vote count showed that Hichilema received 2.81mn votes against 1.81mn for Lungu. The newly elected President Hichilema has the tough task of righting Zambia’s economy, which has been crippled by years of overspending that saw the country be-come the first African nation in the COVID-19 era to default on its sovereign debt. The country is also facing soaring inflation, with CPI at nearly 25%.
- With the election results now out that way, investors will watch closely to see if Hichilema is able to strike a much-needed deal with the International Monetary Fund. In recent comments, Hichilema said that he plans to seal a bailout from the IMF as soon as possible and ini-tiate debt-restructuring talks. Hichilema also noted in recent commentary that he could achieve an economic growth rate of more than 10% within five years. The newly elected President plans to revive Zambia’s economy by boosting growth in the mining, agriculture, con-struction, and manufacturing sectors.
- If Hichilema is going to be successful in reviving the mining sector, he will have to repair relations with copper miners operating in Zambia. Recall that copper is the country’s main source of foreign currency earnings and one of the biggest contributors to the government’s cof-fers. Note that relations between the government and copper producers in Zambia have deteriorated in recent years amid a nationaliza-tion drive under the Lungu administration.
- The copper price finished the week in the green but this morning we have the red metal offered as the week gets underway. Copper is currently down around 1% in the Asian session printing levels of $9472.00/tonne as we head into the start of the EU session.
- The primary driver of the negative tone this morning is the data out China namely retail sales and industrial production, both of which missed expectations as a result of the COVID-19 outbreaks and floods disrupting business activities. Fears of the world’s second largest economy slowing down are not unfounded and will drive much of the tactical price discovery over the next month or two.
- Moving over to the US, it will be a busy week. Retail sales will likely be the pick of the data releases, while the main event will, of course, be the FOMC minutes and any guidance they might offer. The data is expected to continue pointing to an economic recovery, and it is un-likely that just one piece of data in the form of consumer confidence will derail the Fed’s view. On the contrary, we would expect the Fed to continue talking bullishly about the economic recovery and to start openly discussing the timing of the taper.
- Data scheduled today will therefore have only partial interest. Following a gradual improvement in sentiment through the early stages of 2021, optimism in the state of New York’s manufacturing sector hit a record high in June when the Empire State manufacturing index rose from 17.4 to 43.0. However, consensus expectations for the August print are for a notable decline back to more familiar levels, as opti-mism over the U.S. economic reopening fades amid a new wave of COVID-19 infections. Notwithstanding this expected decline, the U.S. economic recovery is in full swing, underpinned by extreme monetary and fiscal stimulus and progress on the vaccination front. Supply chain challenges will likely continue to wane in the coming months, while demand dynamics are on the mend as economic activity contin-ues to rebound.
- The USD retreated sharply on Friday following some disappointing consumer confidence data. Heading into the weekend investors were sensitive to squaring off positions, especially ahead of this week’s FOMC minutes. Investors described the data is triggering a rethink on the timing of an early taper, but this is just one set of data and by no means the most influential. The more likely cause was a market that wanted an excuse to lighten up on some of its long USD positioning. This week should see the USD stabilise ahead of the FOMC. Should the FOMC speak hawkishly about inflation and the taper, the USD will more than unwind the retreat seen on Friday.
- Note that the Zambian Kwacha will resume trading today, with financial markets having been closed on Thursday and Friday due to the general elections.
Rand and International FX Commentary
- The week ended with a battle between the ZAR bulls and bears, with the local currency ultimately able to swing losses in the latter half of the domestic trading session as the US dollar came under pressure. A gauge of US consumer confidence came out far lower than ex-pected, its lowest since 2011 amid the fast-spreading delta COVID-19 variant. This ultimately weighed on the outlook for consumer spend-ing and demand-side inflation expectations in the US, tempering bets that the Fed will have to combat inflation sooner than projected with policy tightening.
- Domestically, newly appointed Finance Minister Enoch Godongwana took a global investor call on Friday, where he pledged to continue the policy framework set up under his predecessor Tito Mboweni. Godongwana faces the arduous task of taking over the reins in the wake of the worst economic downturn in a century while also needing to right the proverbial fiscal ship. Furthermore, he noted the main threats to SA’s fiscus, namely the rising public sector wage bill, SOEs and debt servicing costs.
- While nothing much came in the way of new or unexpected information, the ZAR continued to pare losses into the end of the session, closing the day 0.2% stronger at 14.7350/$. However, the local unit closed off its second consecutive week in the red, falling 0.70% from the previous Friday’s close. Since the August 5th announcement of the recent cabinet reshuffle though, including Godongwana’s ap-pointment and Mboweni’s resignation, the ZAR has weakened roughly 2.4% against the dollar, the most in the EM currency basket, sug-gesting some degree of policy uncertainty has been priced in.
- Meanwhile, risks to growth prospects remain including an upwards trend in third-wave COVID-19 infections, now on the rise in KZN once again. This will likely see the government erring on the side of caution in terms of relaxing restrictions and containment measures. Earlier in the day on Friday, Health Minister Joe Phaahla told a media briefing before putting forward cabinet proposals that the Health Ministry does not recommend lowering virus restrictions.
- While investors will have to continually price in risks to the economic recovery through persistent virus-related restrictions, the week ahead promises some notable data to give an update on the health of SA’s recovery, including mining production, CPI and retail sales stats. The inflation data will likely hold most focus, given implications on SARB policy, while the civil unrest during July may limit the mar-ket-moving potential of the other releases. Externally, eyes will turn to Wednesday’s release of FOMC minutes for hints of how much ta-per talk was discussed at the central bank’s last meeting. The day thus far has seen weaker risk appetite during the Asian trading session, with Chinese retail sales and industrial production continuing to highlight risks of further economic slowdown. As such, emerging market currencies and riskier assets have struggled for traction at the start of the week, while the dollar remains equally subdued following Fri-day’s tumble.