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Local Market Commentary
- Yesterday, Bank of Zambia governor Christopher Mvunga resigned from his post, following opposition leader Hakainde Hichilema’s elec-tion win in August. Note Mvunga has spent just over twelve months on the job. President Hichilema has therefore appointed deputy governor Francis Chipimo to act in the position. Note Mvunga’s appointment in 2020 raised the concerns of many as he was deemed a close ally then-President Lungu. The International Monetary Fund at that time even called for central bank independence and credibility.
- President Hichilema also made some changes to his government, dismissing Fredson Yamba, Secretary to the Treasury, and replacing him with Felix Nkulukusa. Meanwhile, Paul Kabuswe was appointed Mines Minister and will be tasked with carrying out the new govern-ment’s plans to smooth relations with the industry and more than double the nation’s copper production over the next five years. In oth-er cabinet appointments unveiled on Tuesday, Stanley Kakubo was sworn in as foreign affairs minister and Sylvia Masebo as health minis-ter. Former finance minister Felix Mutati was picked as minister of technology and science.
- Meanwhile, Zambia’s Paris Club debt service suspension was extended to December 31 yesterday.
- Moving over to the US, on Thursday and Friday this week, the House Ways and Means Committee plans to announce a measure that aims to tackle workforce perks such as paid leave, child care and retirement savings. It will likely propose a package that will require enormous investment if it is to make this a permanent feature of the American workplace. Democrats have wanted to shift policy in this direction, and they will try to use their dominance in the House and the Senate to get as much done as possible. They will undoubtedly face tre-mendous resistance from the Republicans, while even some of their own internal members will baulk at the expense. More details will become available towards the end of the week.
- Remaining with the theme of workers, the White House confirmed in a statement on Tuesday that States that want to extend enhanced unemployment benefits can do so. This comes a day after the administration and Congress allowed the unemployment benefits to lapse. For those States that wish to continue with the programme, the administration would work alongside them to raise the funding to do so. However, there is likely to be limited take-up of such an option, and even if there was, it would likely be temporary. The economy is growing, and the administration now believes it is the time for the economy to absorb those workers that have lost their jobs. The latest payrolls data notwithstanding, the labour market is improving and will continue to improve through the months ahead.
- On Thursday President Biden will announce a six-pronged strategy to try and curb the spread of Covid-19 that appears to be spreading more rapidly through the US. A drive to increase vaccinations will gather momentum and support, with the urgency now ramping up as children head back to school and hold the potential to further spread the Delta variant. The healthcare system is once again becoming heavily burdened with hospitalisations.
- In FX markets, the ZMW was closed on the back foot yesterday as emerging, and frontier market currencies broadly came under pressure against a rebounding dollar.
- A slight rise in risk aversion has seen the USD find added support. The more stocks are on the defensive, and the more yields rise, the greater the level of support the USD will find. Despite the weaker payrolls data last week, the USD has recovered to a one-week high with some caution expressed ahead of the ECB statement tomorrow. The risk exists that the central bank will seek to cut back on its asset pur-chases to join other central banks that are looking to do the same. Any tightening in monetary policy conditions will cause some conster-nation across riskier markets and cause a moderate rotation to safety. The USD may well benefit from that now that investors have priced in the prospect that the Fed will be slower to taper than first thought.
Rand and International FX Commentary
- Following the spectacular risk rally of recent weeks, market sentiment showed signs of souring on Tuesday as the USD regained its footing on the back of rising US Treasury yields. Consequently, the ZAR bulls ran into headwinds against the greenback, with the local unit depre-ciating 0.50% through the session to close around the R14.3000 mark.
- With the focus primarily on international developments, the market shrugged off a stronger-than-expected local GDP print. The data showed SA’s GDP growth improved from -2.6% y/y to 19.3% y/y in Q2, marking the fastest year-on-year growth rate on record. However, this came off a very low base due to last year’s lockdown-induced Q2 economic crash, while recent changes to Stats SA’s estimation methodology may have also have supported the print at the margin. Nevertheless, the quarter-on-quarter growth rate also came out stronger than expected, rising from 1.0% to 1.2% in the three months through June.
- Looking ahead, the economy’s outlook is somewhat less rosy, with a contraction expected in Q3 due to the deadly July riots and stricter lockdown measures. The combination of these factors will have both a short-term and a long-term impact on business sentiment, which could weigh significantly on economic output going forward. Some of this is likely to be reflected in the BER’s business confidence index for Q3 that is scheduled for release today. Consensus expectations as per Bloomberg surveys are for a decline from 50 to 49, although the balance of risks is to the downside after the significant supply-chain disruptions at the start of the quarter.
- However, the economy may get a boost in the coming days from easing lockdown restrictions as the daily spread rate of COVID-19 infec-tions in SA continues to decline. Local media outlets are reporting that the government is considering easing lockdown measures to alert level two from alert level three, citing sources that were present in President Cyril Ramaphosa’s meeting with the National Coronavirus Command Council yesterday. This may come with incentives to encourage vaccinations and potentially the use of a de facto vaccine pass-port, although it remains to be seen whether this is politically palatable so close to the upcoming local government elections.
- Regarding market dynamics ahead of the local open, risk-off psychology appears to be driving trade this morning. Asian equities and Eu-ropean futures are a sea of red, while most EM currencies are on the back foot against a slightly firmer USD. The USD-ZAR has drifted slightly higher overnight, but was unable to sustain a break through its 100-session moving average around 14.3200. This all points to a consolidatory start to the day for the rand.