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Zambia Market Watch -Risk-off sentiment weighs on base metals

July 21, 2021by Nicholas Kabaso
Please click here to access the full Market WatchLocal Market Commentary

  • Chief Electoral officer Kryticous Nshindano has said that the upcoming August general elections will go ahead as planned unless a state of emergency is declared. Recall last month, Zambia’s electoral body suspended campaign rallies as coronavirus infections in the country rose.
  • Meanwhile, President Lungu is expected to win the 2021 general elections with a 60% lead, according to an opinion poll conducted by a Consortium of Zambian Thought Leaders from various academic institutions and across Zambia and abroad. Main opposition leader Hakainde Hichilema is expected to come second with 36% of the votes. The poll further projected that a run-off was unlikely as President Lungu is expected to maintain a comfortable lead ahead of his rival. According to Chairperson Brian Mwiinga,  President Lungu has contin-ued to command support in his strongholds comprising Luapula, Eastern, Northern, Muchinga, Copperbelt, and Lusaka Provinces while Hichilema has maintained his grip on Southern, Western, and North western Provinces.
  • Base metals gained ground yesterday with all metals apart from Zinc finishing the session in the green. The tone has however shifted this morning as investors in Asia once again favour risk off and are rotating to the likes of the USD. This is pressuring the broader group and we have seen the benchmark 3m LME contract trading around 0.5% lower on the session at $9284.50/tonne as we enter the start of the EU session. Nickel has dropped by almost 2% to $18315/tonne. 
  • What is interesting to note is that the premium for cash copper over 3m is at a near three week high of $13.25 following reports of LME in-ventories hitting a one-year low of 66 975 tonnes.
  • US interest rate futures are pointing to a significantly reduced risk of rate hikes at present, with news of the continued spread of COVID infections calling into question the economic recovery. Higher infection rates could lead to the further restriction on the movement of people, while questioning whether vaccine rollout is meaningfully affecting overall societal risk with a broader health epidemic underway.
  • The spending of the US’s most wealthy generation, the boomers, has been under structural pressure for some time, and with further COVID restrictions, we could well see the taps tightened further. Risks remain skewed toward weakening in consumption demand in this context.
  • This is leading to softer interest rate risk. The Fed seems likely to stick to its lower-for-longer rates mantra in this context, with OIS futures pricing out around 100bp worth of rate hike risk in the longer end since April against the backdrop of a Fed that remains concerned about fragility in the labour market. The 2-year swap rate has fallen around 6bp since July peaks to 27bp. This as UST yields fall aggressively while the USD strengthens to point to a market that remains poised for a deeper sell-off.
  • US Treasury yields have stabilised around recent lows, with investors now perhaps a little less prone amid news of surging COVID cases after rotating into USTs in recent sessions. Eyes will be on the hospitalisation and death rates in the weeks ahead, with upside pressure expected in some places given the prevalence of new infections. At a current yield of 1.21%, there is talk that the 10y could be headed to 1%. This would imply continued rotation into the safety of USTs and likely come with further dollar strength.
  • FX markets are strongly favouring the dollar at the moment, the USD Index has cleared the 93.00 handle as the safe haven play extends. When looking at a USD Index chart we see the upside trend remaining intact at present with yesterday’s high at 93.17 the target for dollar bulls this morning. Longer term, the year to date high at 93,437 is very much in the cross hairs. In terms of flow, its been a quiet Asian ses-sion for the EUR-USD, investors are waiting on tomorrow’s ECB decision and statement before making a call on whether or not the policy divergence between the Fed and ECB accelerates, for now we favour selling on any EUR-USD upticks on a tactical basis.
  • Locally, the Kwacha remained on the front foot yesterday,  continuing to pare some of the recent losses. USD-ZMW, therefore, closed just south of the 22.300 mark, according to Reuters data.


Rand and International FX Commentary

  • After holding steady for most of domestic trading hours yesterday, the ZAR depreciated in line with the broader sample of EM currencies amidst fears of a global economic slowdown as surging cases of the Delta COVID-19 variant continue worldwide. Meanwhile, the US dollar was supported in the risk-off conditions, with the dollar index (DXY) continuing to edge its way towards March highs of around 93.4, where a break of this level would see the dollar reaching its strongest trade-weighted level since November 2020.  
  • As for domestic data, the ZAR ultimately took little favour from the release of the SARB’s leading indicator, which rose for the fourth con-secutive month in May to 128.8. This marks a fresh record high as economic normalisation continues following the easing of lockdown re-strictions and indicates an upwards trajectory in GDP remained intact in Q2. Although SA’s economy continued to gain traction according to the central bank’s leading indicator, its sustainability will undoubtedly be questioned given the latest lockdown restrictions and civil in-stability. The recent riots have highlighted the economy’s major vulnerabilities, being high unemployment and poverty levels, while politi-cal uncertainty, poor fiscal dynamics and unstable power supply are also still key risks that could weigh on the economy going forward.
  • Despite an announcement from the South African Financial Sector Conduct Authority that Sasria, South Africa’s only non-life insurer cov-ering civil commotion, disorder, strikes, riots and terrorism, will settle claims arising from last week’s riots, there will nevertheless be a huge hit to third quarter GDP. Should this ultimately result in a contraction, it would bring the economy’s recovery to a halt in the near term. Resultantly, growth expectations for the year will need to be revised, which holds implications for SARB rate hike potential. As such, the market will intently focus on this week’s SARB update should revisions come on the growth and inflation front due to the probable demand dip following the civil unrest. As for upside inflation risks, supply constraints caused by the riots could push up inflationary pres-sures, however this temporary factor will unlikely fast track any SARB action given the weaker growth prospects. 
  • Ahead of the SARB’s announcement tomorrow, today’s inflation print will steal the focus. The CPI’s rise in June is already expected to have eased from a 30-month high reached in May as base effects continue to be filtered out. Base effects aside, inflation dynamics in SA remain fundamentally weak and contained by weak consumption demand. Core inflation, which excludes volatile goods such as food, non-alcoholic beverages, fuel and energy, has remained anchored near the SARB’s lower bound of its 3-6% target range. This gives the SARB plenty justification to keep rate hikes on hold, on top of the weaker growth prospects along with riot damage. 
  • In the spot markets this morning, the ZAR has led EM currencies weaker during the Asian trading session as the unit remains highly sensi-tive to the current risk-off conditions. Despite global equity markets returning to positive territory, a weakening trend remains en-trenched amongst the EM sample of currencies as the USD remains bid with limited catalysts in the day ahead expected to alter current dynamics.  

Nicholas Kabaso

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