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Zambia Market Watch -Spiking global COVID-19 cases trigger risk-off sentiment

July 20, 2021by Nicholas Kabaso
  • The Bank of Zambia (BoZ) reported that it has purchased 478.76kgs of gold at a cost of ZMW 604.3mn since December last year. A break-down of the data shows that 391.92kgs was purchased from Kansanshi Copper Mining Plc at a cost of ZMW 500.5mn and 86.84kgs from Zambia Gold Company, a subsidiary of ZCCM-IH at a cost of ZMW 103.8mn. Note the BoZ plans to purchase 746.5kgs of London Good De-livery gold from Kansanshi Copper Mining Plc and about 120kgs of dore gold with a minimum 88% purity from Zambia Gold Company per year. According to the bank, the objective of this initiative is to shore up and diversify the international reserves. The attractiveness of this venture is that the gold is being purchased in local currency.
  • Massive risk off yesterday resulted in a bloodbath for those long of base metals. Financial markets have taken a strong dislike to the cur-rent strain of the COVID-19 virus namely the Delta variant with this now becoming the tactical focal point. Concerns of the variant derailing the current economic progress is the underlying driver.
  • The 3m LME copper benchmark closed 2.2% lower on the day finishing the session at $9222/tonne, while the price of Nickel finished the day 3.24% lower at $18462/tonne.
  • This morning we have seen the losses filter through to the Chinese market with the front month Shanghai copper contract falling to an in-tra-day low of CNY67400/tonne its lowest level since June 23.  The 3m LME contract has however managed to dust itself off and we are presently trading 0.5% higher on the session at $9271/tonne into the EU open.
  • Moving over to the US, note there has here has been a clear bear run emerging in financial markets with the 10y yield down to 1.20%, which marks the lowest yield since February. The dollar is also finding support, which suggests that safe-haven demand is rising. The risk of another flare-up in COVID infections remains a core concern to investors at present while raising the risk that we see more lockdowns and crimping of spending. That may ultimately prove to be a good thing, with US retail sales still much higher than pre-COVID levels de-spite weak underlying growth.
  • The charts on the 10y yield suggest that the market could have quite a bit further to run with resistance levels broken at 1.20%, opening up to Fibo support at 1.125% and then 0.977%, which could stifle the US equity market that many fear has reached a point of overvalua-tion. By and large, with US stimulus efforts maxed out, if growth pressures start to wane again, the market could start to price in the risk of a more stagflation environment where growth slows yet prices rise. Historically, stagflation has not been good for stocks.
  • The FX markets have seen a strong rotation to the traditional safe haven currencies over the past 24 hours as the market focuses squarely on the risks associated with the rising Delta COVID-19 variant cases across the globe. The USD Index took a peek above the 93.00 handle yesterday while this morning investors are seeing the 92.80 level as the short term floor from which they will add to longs. The JPY equally tested multi-month highs and the expectation is that 109 will give way, it’s only a matter of time. The EUR continues to underperform the USD, the single currency dipped to lows last seen in April overnight and remains vulnerable as we head into the start of the EU session. Those looking to short to the EUR-USD will have yesterday’s lows at $1.1764 in their cross hairs.
  • Locally, Kwacha bulls were in control yesterday as the local unit ended on the front foot. According to Bloomberg data, gains on the day saw the Kwacha rank second in terms of the performance of African currencies against the USD, with only the Ghanaian cedi faring bet-ter.

Nicholas Kabaso

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