Local Market Commentary
- In the build-up to Thursday’s general elections, the US has warned that it will impose sanctions on Zambians that undermine the electoral process. US Charge d’ Affairs David Young said that the US is closely monitoring the situation and that the US is prepared to apply financial sanctions, visa restrictions, and travel bans on people who will violate human rights and democratic freedoms of Zambians in this year’s general elections. Young also added that the US government was concerned with the political violence that has characterized the election period so far.
- Meanwhile, President Lungu yesterday called for an end to the violence that has been witnessed so far. President Lungu was quoted as saying, “what we have seen happen in the last few days of killing people, hacking them like animals cannot be allowed to continue. Every-thing we have and cherish as Zambia can fall into pieces. The politically motivated murders we have seen recently must be condemned.” Note tensions are highlighted by reports of violence attributed mainly to the countries two major parties, Lungu’s ruling PF and Hichilema’s United Party for National Development.
- Zambia on Monday launched the second terminal building at the Kenneth Kaunda International Airport, which will increase the number of passengers from the current 2mn to 4mn per year. The project financed by the Export-Import Bank of China (China Exim Bank) is de-signed and built by Jiangxi Corporation for International Economic and Technical Cooperation. The construction works started in 2015. Once completed, the project will also have a hotel, cargo terminal, air traffic control building, rescue and fire station, and a shopping mall.
- Yesterday was not a good day for base metals across the board. Copper shed just over 1% on the day while the likes of Nickel experi-enced harder selling shedding just over 3% on the day. The spread of the Delta variant of COVID-19 coupled with concerns over Chinese demand given decline in copper and iron ore imports all driving price action yesterday.
- This morning the tone is better with 3m LME copper up by 0.7% at $9434.00/oz into the EU open, this comes on the back of supply con-cerns as strike action looms at BHP’s Escondida mine in Chile.
- News overnight is that workers and management at the mine have agreed to extend talks after failing to reach an agreement in the allot-ted time. They have agreed to extend by another day so that a solution may be presented to the workers today. BHP have acceded to various points and thus the union believes that there could be a meeting of minds.
- It is worth noting that Escondida is responsible for 5% of the global copper production at present and thus any threat to this supply will underpin price action. This union is not a stranger to strike action, crippling the mine for 44 days in 2017.
- Stateside, nothing in the way of significant market-moving data will leave the focus with Fedspeakers and the guidance they offer on ta-pering. Yesterday two Fed speakers in the form of Bostic and Barkin both painted a picture for the need to consider tapering by year-end. Inflation is above the 2% market and could rise further, while the labour market is gathering strong momentum and rehiring is now set to take lace at a more rapid pace. There will be more Fedspeak today when the Fed’s Mester takes to the podium, but the overall message is unlikely to change. The US economy is gaining momentum and a taper will be appropriate in the months ahead as inflation becomes more of a concern.
- But the environment remains a complex one, made more complicated by the resurgent Delta variant of the coronavirus. There are dis-ruptions in some states and in countries around the globe that continue to impose restrictions. Turning too complacent now would not be a good idea although it is very clear that those most affected are those that have not had their vaccines. Nonetheless, this continues to pose a risk that is not insignificant. nally, it is worth noting that US Treasury Secretary Yellen has warned Congress not to delay the passing of a bi-partisan bill to extend the debt ceiling so as to avoid a government shutdown in October. The warning aims to mitigate the effects of a self-inflicted shutdown at a precarious time in the economic recovery. The Republicans will however be reluctant to do away with one of the few pieces of leverage that they have over the Democrats to contain spending.
- Shifting to the FX market, consolidation was the order of the day as the ZMW closed little-changed yesterday. More Fedspeak and a stronger case for tapering and the USD has found more support. The USD index is now trading up to the highs seen in mid-July, with a break above that offering the greenback a green light to rally further. There is limited data and information for traders to respond to at the moment, which will leave the focus for today on any comments made by the Fed’s Mester. For now, the weekly bias appears to be tilted more to the topside.
Rand and International FX Commentary
- A cabinet reshuffle announced by President Cyril Ramaphosa last Thursday and solid US jobs data on Friday ultimately saw the ZAR end last week on the back foot. While the ZAR initially sank 2.50% on the resignation of former Finance Minister Tito Mboweni, further down-side pressure was limited as the currency quickly trimmed losses during the session following the announcement of cabinet changes, in-cluding Enoch Godongwana as the new finance chief. Investors ultimately assessed the change to have minimal impact on fiscal consolida-tions plans, with challenges on that front remaining firmly in place given the government’s reliance on debt and South Africa’s low-trend growth to support expansive fiscal policy.
- However, losses on the session were not fully recouped as riskier currencies, in general, were dealt a blow by a bumper US jobs report. The nonfarm payrolls print surprised to the topside, with the US economy adding 943k jobs in July compared to expectations surveyed by Bloomberg of 870k, pointing to a healthy labour market. This is ultimately a step towards meeting the Fed’s goal of reaching pre-pandemic labour market conditions, which would see the central bank removing monetary support along the way. US Treasury yields have subse-quently traded to near one-month highs, increasing the greenback’s appeal while weighing on emerging market and riskier assets.
- The combination of Friday’s developments saw the ZAR end the session 1.70% weaker at 14.6300/$, removing all of its weekly gains. With domestic markets shut for a holiday yesterday, international trade saw the local unit take direction from broader currency dynamics. The USD, meanwhile, remained buoyant and received a boost from hawkish comments of central bank officials yesterday. Atlanta Fed Presi-dent Raphael Bostic said he is eyeing a fourth-quarter start to tapering, while Boston Fed President Rosengren said the Fed should an-nounce at the September meeting that it will start reducing its $120 billion monthly Treasury and mortgage bonds.
- As such, the ZAR picked up where last week left off, declining 0.70% to close at 14.7350/$. Weaker sentiment has followed through over-night, with the ZAR trading amongst the laggards in the EM sample of currencies on the day thus far. Domestic manufacturing data in the day ahead will unlikely turn the tide for the ZAR, given the data will be based on June’s output and any recovery will likely have been un-done by the riots and looting that July held. The week ahead will see more up-to-date data with the SACCI business confidence index due tomorrow, while the domestic data card is rounded off on Thursday with mining production stats. Externally, the market has Eurozone economic sentiment data to digest in the day ahead, where even a considerably strong reading is unlikely to support the euro against a significantly buoyant USD at present.