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Local Market Commentary
- Rising COVID-19 cases and the threat of slowing economic dynamism as a result have driven base metals lower overnight. As mentioned earlier in the week, the Delta variant of the coronavirus is testing defences across China and the Southern United States while much of Asia such as Australia remains in hard lockdown which is hitting broader sentiment.
- 3m LME copper closed below the $9500.00/tonne mark yesterday while the Shanghai front month contract is pressured this morning in Asia. The LME contract has recovered somewhat and is pivoting around the $9500.00/tonne mark but the threat of further losses in the short term remains.
- On the news front, Reuters reported the following – Foreign companies operating in world top copper miner Chile on Wednesday asked lawmakers to rewrite a controversial bill that would slap royalties on their sales, warning the fresh taxes could squander their competi-tiveness and future investment plans. The royalty bill has gained momentum this year as prices of the red metal – critical for its use in con-struction and automaking industries – have soared amid a nascent global recovery following the coronavirus pandemic.
- Big news in the US session yesterday were comments made by Fed Vice Chair Richard Clarida, who noted that “policy normalisation in 2023 would … be entirely consistent with our new flexible average inflation targeting framework”. He added that he could “certainly” see the Fed announcing a reduction in its $120bn/month asset purchase programme later this year, given the surprising pace of the US eco-nomic recovery from the coronavirus pandemic. The comments follow a good few weeks of interest rates futures drifting lower amid an uncertain labour market outlook, which is reducing expectations for inflation to remain high for all that long.
- The vice chair’s comments were consistent with hawkish remarks made by other Fed officials through the day, with Fed officials Robert Kaplan, James Bullard, and Mary Daly signalling a readiness to begin tapering Fed stimulus later this year or in early 2022. However, it is worth noting that recent policy guidance provided by other Fed officials, such as Lael Brainard and Chairman Jerome Powell, have sug-gested more positive jobs data may be needed before any decision on monetary tightening could be made.
- This suggests there is still little in the way of consensus within the Federal Reserve over the timing of monetary tightening, although it is difficult to see the Fed not taking on a more hawkish tone in the months ahead as it looks to gradually guide markets towards the inevita-ble taper.
- Non-farm payrolls remain the major focus into the weekend and, following a weak ADP employment print yesterday, there is some rea-son to think that yet another soft outcome from the US labour market could be expected. The Fed will be mostly focussed on the average hourly earnings metrics which will be weighed against the total number of new entrants into the jobs market.
- The July Markit/Stanbic PMI release will offer further insights into the business conditions in Zambia at the start of Q3. Recall business conditions in Zambia deteriorated marginally at the end of Q2. Specifically, the Markit/Stanbic PMI edged down to 49.3 in June from 49.7 in the month prior. The latest wave of the coronavirus pandemic currently engulfing Zambia and most countries on the continent poses downsides risks to July’s reading.
- Shifting to the FX market, Kwacha bears regained some control yesterday as the local unit closed marginally weaker. Meanwhile, the dol-lar received a boost from statements made by Fed Vice Chairman Clarida that the central bank is on course to pull back its stimulus sup-port later this year before hiking rates in 2023. The dollar rally was however not as aggressive as it may have been with many investors preferring to adopt a wait and see approach given the looming US Non-Farm Payrolls number tomorrow. The USD Index is currently just north of 92.20 as we enter the start of the EU session, while the EUR-USD is holding just below the 1.1840 mark with some options related orders keeping the single currency contained. In terms of the USD-JPY we see the pair bid with the JPY out of favour for now
Rand and International FX Commentary
- The ZAR initially looked set to strengthen for a third consecutive day yesterday, shrugging off weak domestic data and taking cues from broader market dynamics which are seeing a persistently pressured US dollar. EM and major currencies were broadly in the green yester-day against the dollar as bets that the US Fed would have to taper asset purchases in the coming months were dealt a blow. Specifically, US private payroll data from the ADP Research Institute came out significantly weaker than expected, with firms adding 330k jobs in July compared to expectations in line with June’s hiring of 692k.
- However, not long after, comments from Fed officials provided a backstop for the USD and saw US Treasury yields tick higher. Fed Vice Chair Richard Clarida said conditions for rate hikes could be met by the end of 2022 and rate hikes projections for 2023 remain on track should the economy progress as expected. These comments came as a surprise to markets after last week’s dovish address from Chair-man Jerome Powell, while the Vice Chairman also noted we could see a reduction in monthly asset purchases later this year. With FX market dynamics highly contingent on forward policy guidance from the Fed, hawkish Fedspeak put a firm stop to yesterday’s weakening dollar trend. This saw the USD-ZAR bounce off three-week highs of 14.2200 hit earlier in the session, adding 0.40% by the end of London trading hours.
- As for yesterday’s data, the private payrolls report ultimately sets the tone for the official nonfarm payrolls print due tomorrow. Given the implications for an uneven economic recovery, this reduces the potential for the Fed to begin tapering asset purchases until such a time that the data shows several months of solid hiring to put the jobs market on track to pre-pandemic levels. Despite yesterday’s Fed comments, extremely accommodative stateside financing conditions will remain until sufficient labour market slack is taken up, support-ing risk appetite and riskier EM assets.
- In terms of domestic data, the economy-wide Standard Bank PMI fell to 46.1 in July from 51 in June, the first dip into contractionary terri-tory since September last year and the lowest level in eleven months. The latest reading pointed to a substantial deterioration in business conditions, led by renewed declines in new orders, employment and stocks of purchases, and a much sharper fall in output. While the da-ta will likely show a temporary dip in reaction to the riots and looting of last month, it will not show the full long-term ramifications. Last month’s civil unrest saw the reinstatement of monthly welfare payments, which Social Development Minister Lindiwe Zulu described yes-terday as a “stepping stone” to introducing a basic income grant. FinMin Tito Mboweni last week said the new grant payments lasting until March 2021 will cost the government R27 billion. This ultimately risks upsetting National Treasury’s fiscal consolidation plans and could see public finances continue to deteriorate, likely resulting in further credit rating downgrades in years to come.
- As for the day thus far, traditional haven currencies have come under pressure, with the Japanese Yen and Swiss Franc both down. This suggests improving risk appetite in the day ahead, however the USD has held steady in early morning trade after yesterday’s broad gains. The ZAR, meanwhile, has snapped back after yesterday’s losses, with the unit likely to test yesterday’s three-week highs again should EM sentiment remain positive.