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Zambia Market Watch –  Price of copper rebounds overnight

November 19, 2021by Nicholas Kabaso
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Local Market Commentary

  • To improve the manufacturing sector, President Hakainde Hichilema yesterday called for the promotion of local products. Speaking at a Zambia Association of Manufacturers (ZAM) conference, the President said that the importance of the manufacturing sector to the government’s economic transformation agenda could not be overemphasized as it was a vital sector in job creation. Hakainde added that the capacities of lo-cal businesses need to be enhanced to ensure value addition and that the government was working at creating a conducive environment for businesses to thrive.
  • In the base metals complex, the price of copper rebounded overnight with the 3m LME benchmark climbing by 0.37% breaking a string of loss-es with upbeat US data supporting thoughts of rising demand at a time of low inventory levels. The gains have accelerated this morning with the red metal adding 1.75% at the time of writing to trade at $9607.00/tonne.
  • Copper premiums have spiked in China to the highest level in at least six years according to Bloomberg data. Spot Chinese copper is currently at a premium of CNY2200 to its 3m counterpart as inventory levels fall to the lowest level since 2009, while supply chain bottlenecks and slow-ing of invoice processing at Chinese customs hampers imports.
  • U.S. economic data remains strong and continues to point to an economy in the midst of a recovery. Weekly jobless claims were sufficiently soft to assist the continuing claims data drop towards the 2mn mark, which it will surely breach in the coming months. The Philly Fed Index was even more impressive as it delivered a very powerful topside surprise to print a reading of 39.0 for Nov vs an expectation of just 24 and a prior reading of 23.8 for Oct. The data continues to reflect an economy in the midst of a powerful upswing that will continue to feature prominently in earnings generation for listed companies.
  • It is therefore not surprising to see U.S. stock markets rally to fresh record highs. Not only are earnings results strong, but there are very few reasons why they should not expect them to remain that way or even improve further. The lagged effects of enormous monetary and fiscal policy will last for many quarters to come, and the upside bias in stock markets is therefore expected to last for many more quarters to come.
  • On the topic of stimulus, the Biden administration continues to make headway in pushing the $1.75trln social spending bill. Although it will add to the budget deficit by some $360bn, according to the CBO, it will still inject fresh spending to ensure that the economic upswing enjoys solid underlying momentum. On top of the ultra-accommodative monetary policy and the lagged effects that will drive the business cycle for years to come, this only strengthens the argument for an upbeat equity market outlook.
  • In the FX markets, the Kwacha weakness seen this week is expected to persist next week amid limited hard currency supply. Although the USD has pulled off its intra-week highs, it will remain well supported by the strong economic data that will promote speculation that the Fed needs to bring forward the timing of a rate hike. The trend remains overwhelmingly in favour of further USD gains, with the monetary policy differential between the U.S. and its major trading partners also expected to support the USD for a little longer. That being said, there is a lot priced in, and the USD is no longer looking attractive. However, so long as U.S. data remains strong, it will likely remain well bid.

Rand and International FX Commentary

  • For the first time in three years, the SARB has chosen to hike rates. It was a significant decision and a bold one given the backdrop of the pan-demic and the extremely weak economic data, but it was the correct one. Interestingly, the ZAR did not respond positively to the news. On the contrary, shortly after the announcement was made, the ZAR found itself on the defensive, losing even more ground before clawing some of that back.
  • One of the key takeaway points was that monetary policy was already extremely loose and needed to normalise at least partially to be more prudent. A second was that in hiking earlier, the SARB might very well avoid having to hike more aggressively later in the cycle. The realisation that rate hikes could be more gradual than first anticipated was a key factor that dented sentiment towards the ZAR. Investors had been over-zealous, based on the SARB’s Quarterly Projection Model, and those expectations will now need to be scaled back. Secondly, this unfolds against the backdrop of a USD that has found support amid a shift in expectations towards a more rapid tightening of monetary policy.
  • The combination leaves the ZAR vulnerable, especially as the stronger USD also detracts from the performance of commodity prices, which have had a difficult week. Therefore, the ZAR’s performance is not out of kilter with underlying fundamentals ahead of Moody’s and S&P’s sovereign debt rating reviews this evening. Although the improvement in SA’s debt metrics could help generate improved reviews, this is al-ready known and will be largely priced into the market.
  • Only an extremely positive review could see the ZAR respond favourably. But even then, that is unlikely given that rating agencies are tradi-tionally quite conservative in their assessments and will likely still draw attention to the many structural headwinds that the SA economy faces, including but not limited to low growth, unemployment and the budget deficit. They are all too troubling to promote fiscal consolidation and sustainability, and the rating agencies will likely raise that as a concern, the improved fiscal ratios notwithstanding. Therefore, heading into the weekend, it seems unlikely that the ZAR will stage a recovery just yet. On the contrary, it remains vulnerable.

Nicholas Kabaso

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