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Local Market Commentary
- Sentiment towards Zambia continues to improve amid growing hopes that the Hichilema administration will be able to put the country back on a sustainable debt trajectory. Speaking on Friday, Zambia’s newly-appointed Finance Minister Situmbeko Musokotwane pledged to conclude talks with the IMF on a lending program by October. The market has reacted positively to the appointment of Musokotwane, who was Finance Minister from 2008 to 2011, amid expectations that he will be able to rein in spending and narrow Zambia’s massive budget deficit.
- Musokotwane said in an interview after his appointment that unless the ministry does something to the budget, the budget will be main-ly for paying salaries and also servicing debt, adding that there will be nothing left over to invest in developing the country. When ques-tioned about how he plans to deal with the country’s $12bn external debt pile, Musokotwane said, “the answer is to talk to the people we owe money so that we can pay at a slower pace stretched over a longer period.”
- Note that newly elected Finance Minister Musokotwane held positions with the International Monetary Fund and World Bank and is al-ready seen as a safer pair of hands to guide the country back to a position of fiscal sustainability. The first major hurdle for Musokotwane to overcome is to strike a deal with the IMF, which would provide fiscal relief for the country that became the first African nation in the COVID-era to default.
- Looking ahead, the challenge that Musokotwane has ahead of himself can’t be understated. That said, the market clearly backs the new Finance Minister. However, the market will need to see concrete evidence that Musokotwane is steering the country towards a sustaina-ble fiscal position if the bullish bias is to remain entrenched. For now, we see room for further strengthening in Zambian Eurobonds.
- On the mining front, Musokotwane, pledged to more than double the country’s copper output in five years. Note, . Hichilema’s admin-istration aims to more than double copper output to as much as two million metric tons yearly by 2026, and ultimately about three million tons in a decade. Musokotwane pledged to support copper production by creating a favourable environment for investment.
- Moving over to the US, the main event worth covering this morning were the developments that began on Friday and extended over the weekend. Most notable was Fed Chairman Powell’s speech on Friday, which was slightly more dovish than many anticipated. Although he committed to tapering sometime later this year, he was not specific and still highlighted the need to see further improvement in parts of the economy before the Fed would act. There may be an announcement made in the Sep FOMC as to when tapering could begin, but further improvement in the labour market will almost certainly be a prerequisite.
- Therefore, this week’s labour market data takes on renewed importance. Investors will want to see a strong result in the data before they actively price in the probability that a Fed taper is imminent. The risk is that the data misses expectations, with so much good news priced in. The data has been improving and will continue to improve, but the recent economic surprises index shows that economic data from the U.S. have surprised to the downside. Any downside surprise will only serve to highlight the Fed’s point that it needs to be sensi-tive to the economy and only taper when it is convinced that the underlying momentum is strong enough to sustain the economy through the taper. Investors are reminded that the ADP, weekly jobless claims and payrolls data will all be released this week.
- In the way of data intra-day, pending home sales data will be reported. Although interesting and will offer perspective into the dynamics affecting household balance sheets, this is not a market-moving release. The data, for now, is slightly elevated but looking to settle into a range seen prior to the pandemic. That being said, ultra-low interest rates generally remain supportive and will prevent any significant downside surprise.
- Shifting to the FX markets, the ZMW is expected to remain on the front foot this week amid increasing dollar inflows and the positive sen-timent surrounding the new Zambian administration led by President Hakainde Hichilema. Meanwhile, the USD took a beating on Friday. So much in the way of taper expectations had been priced in, that a mildly more dovish comment from the Fed translated into a sharp re-treat on the USD. Although there will be some apprehension ahead of the US payrolls data later this week which may prevent the USD from retreating wholesale, the tide does appear to have turned against the USD in the short-term. It now remains vulnerable to any fur-ther under-performing data releases. Should the labour market data this week miss expectations, the USD will find itself further on the defensive.
Rand and International FX Commentary
- With the Fed’s Jackson Hole symposium stealing the spotlight last week, given implications for near term Fed stimulus changes, markets were understandably cautious prior to an address by Fed Chairman Jerome Powell where it was expected he might indicate when the central bank may begin reducing its monthly asset purchases.
- However, it was apparent that the Fed will continue to err on the side of caution as the coronavirus pandemic still presents risks of an uneven recovery. Powell stated that while progress has been made in the jobs market, substantial slack remained and there was more ground to cover to achieve full reemployment. He also noted that inflation had met conditions that would call for reducing monetary support, but added that premature tightening would be particularly harmful to the economy with the unemployment rate still elevated.
- Overall, the market deemed the Fed Chairman’s speech as overly dovish, which saw the USD tumble in afternoon trade. This ultimately tempered bets for a September announcement of asset purchase tapering, meaning financing conditions are to stay highly accommodative in the near term, in turn bolstering riskier assets. As for the USD-ZAR, the speech saw the currency pair drop to 14.7000 after hovering near the 14.9000-handle for most of Friday’s domestic trading session. Aided by a 1.30% gain on Friday, the ZAR ultimately closed the week 3.90% stronger than the previous as it advanced every day last week.
- While the ZAR’s gains were notable, recall that the prior week held a 3.65% loss for the local unit. As such, the ZAR remains in the red on a month-to-date basis as it approaches its mid-August trading range, with plenty of potential for market-moving data in the week ahead.
- The first half of the week features a bumper domestic data card beginning with government budget balance data today. Following that, Tuesday holds private sector credit growth, money supply stats and trade balance data. Wednesday gives an update on the productive side of the economy with the Absa manufacturing PMI alongside NAAMSA vehicle sales, while the week is rounded out with the economy-wide Standard Bank PMI on Friday.
- Externally, the start of the new month in the latter half of the week brings US employment data in the form of nonfarm payrolls. Given the Fed’s aim for an inclusive recovery, employment prints hold high market-moving potential in the event they underwhelm or come out stronger than expected. As for today, market sentiment has been mixed, with currency markets not taking much positive direction from buoyant Asian equities this morning. The ZAR has hovered around last week’s close of 14.7200/$ as it awaits broader direction likely to come at the local open. The USD remains on the back foot in morning trade, suggesting the ZAR could have an easier time capitalising in the day ahead. However, liquidity-thinned conditions on account of a UK bank holiday could hold the local unit back while potentially heightening intraday volatility.