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Local Market Commentary
- President Hakainde Hichilema has told lawmakers that the government will consult stakeholders in reviewing the mining tax policy framework. Hakainde added that the government will ensure that it receives a “fair share” from mineral wealth and that electricity tariffs reflect generation costs. Moreover, the government will ensure the stability of the sector, given it is set to play a key role in accelerating economic growth. Finally, Hakainde said that mining is a long-term business and Zambia cannot “change fiscal policies every other year.” Stability to the mining industry will be key in helping the government reach its goal of more than trebling output. Note, copper producers have indicated that they are ready to start expansion projects worth $2bn in Zambia next year if the industry can reach an agreement on royalties with President Hichilema’s administration.
- Hichilema also promised to reduce the fiscal deficit, restore economic growth, review agricultural policies, revise electricity prices, and re-form state power firm Zesco. The President was quoted as saying, “rebuilding our economy is top on our agenda. We will implement poli-cies to address the fiscal deficit while ensuring that confidence is restored in the markets. We have indeed inherited an economy that is in dire straits and requires bold and decisive action to be taken.”
- Copper ramped up sharply into the close on Friday adding some 3.22% on the day while the likes of aluminium closed 2.93% higher at $2924/tonne and nickel finished 1% higher at 20392/tonne.
- Stateside, after a shortened and very quiet data week, the calendar becomes a lot busier this week with a host of important releases to consider. Inflation is arguably one of the most important and will be released today, but the week also includes retail sales, industrial pro-duction and the Michigan consumer sentiment index. The combination will offer a fresh perspective on dynamics the Fed will consider in its decision-making process and whether a taper is justified before the year’s end. Cleveland Fed President Mester again reiterated her view that she would favour the Fed tapering before the end of the year, to join a strong of her colleagues in arguing for the same.
- Inflation in the U.S. has become a key component to the Fed’s decision on tapering. It is well above the Fed’s target and features promi-nently in the Fed’s mandate. Although The Fed under Chairman Powell changed the mandate to become more flexible, there is no doubt that inflation and inflation expectations will feature prominently in the months ahead. Any signs that the labour market is gaining momen-tum which dislodge inflation expectations, and the Fed will almost be forced to act or lose credibility as an inflation fighter. Many Fed speakers have already mentioned that inflation meets the requirements for the Fed to act.
- In other developments, it is notable, although not surprising, that the Dow and S&P have posted five days worth of losses. Whether this is sustained or not will impact sentiment across many other risk markets. Recent earnings reports have been strong, so instinctively, one could argue that the retreat is not warranted and is nothing more than a breather in a long-term trend. However, in most market-related matters, it is not always the obvious argument that wins the day. Often it also relates to just how much good news has been priced in rel-ative to recent trends.
- In the FX markets, the Zambian Kwacha is expected to some gains against the greenback this week, supported by corporate firms selling hard currency in preparation for tax payments. Meanwhile, through the past week, the USD staged a recovery. It is not surprising given the retreat in equity markets that has raised overall levels of risk aversion, although it should be added that Wall St futures are moderate-ly positive this morning at the time of writing. U.S. inflation tomorrow will take centre stage, and anything higher than the 5.3% y/y antici-pated could further boost the USD’s performance. Technicals on the daily are non-committal and do not favour any outright direction one way or another. This may be in anticipation of the data this week and the bias it might generate.
Rand and International FX Commentary
- The ZAR initially led emerging market currencies into the end of the week, hitting a 14.0600/$ intraday high, the unit’s strongest level since late June. However, the local currency ultimately reversed gains, with the USD-ZAR currency pair sticking to support around the 14.2000/$-handle. Nevertheless, the ZAR still led weekly gains amongst a broadly depressed EM currency basket, securing its third weekly gain as it advanced 0.75% from the previous week’s close. Meanwhile, the US dollar stabilised enough during the week for it to post its first trade-weighted weekly gain in a month.
- Some positive news over the weekend has followed with President Ramaphosa announcing last night that virus restrictions will be re-laxed by one level from the government’s alert level three. Included in the changes, alcohol sales will now be permitted on Fridays, non-essential establishments such as bars and restaurants will be allowed to remain open until 10pm, with shortened curfew hours and in-creased sizes of gatherings permitted. The relaxation of ongoing restrictions, allowing more freedom of trade and economic activity, is undoubtedly positive for the broader economy and economic recovery underway. However, this will likely have only a marginal effect in the near term, especially given July’s domestic unrest.
- Furthermore, the stop-start nature of restrictions and potential risks from a fourth wave of infections will likely see business confidence subdued for some time until there is greater clarity of an exit to the pandemic and no more return of restrictions. On that front, Rama-phosa urged the public to get vaccinated so that risks from a fourth wave of infections could be mitigated, while he also announced plans to introduce “vaccine passports” with more information to follow in the next two weeks.
- As for the day ahead, a slim global data card means markets may err on the side of caution ahead of a data-filled week. Sentiment during the Asian trading session has been a poor showing, with most Asian equities trading weaker. Moves in FX markets have been similar, with the USD picking up where it left off last week, stronger against most major currencies. Markets will be waiting in anticipation for tomor-row’s US August CPI release, which has yet to show any easing of inflationary pressure and is proving to be an ongoing bugbear for a Fed preferring to maintain its highly accommodative policy stance. Domestically, July’s delayed mining production data is expected to kick off the domestic data card tomorrow, while retail sales data is due Wednesday. As for the local currency, its moves remain highly correlated with market risk appetite and thus broader USD dynamics. With the USD stabilising and looking to form a base, this suggests the ZAR may encounter some headwind resistance on its current bullish run.