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Local Market Commentary
- Secretary to the Treasury Felix Nkulukusa yesterday said that Zambia will resume talks for an IMF deal on Wednesday, a key step before restructuring the country’s debt . Nkulukusa said in response to questions at a post-budget event that the government was confident discussions with the IMF would be concluded as planned. According to Nkulukusa, “two days from now we will be engaging with them for the rest of the month with a view to making sure that we conclude everything, and probably as we go into 2022, we can have a pro-gramme that then we can ride on to be part of the common framework for debt restructuring and be able to achieve that debt restruc-turing.”
- Copper has eased this morning with investors battening down the hatches ahead of the FOMC decision on rates tomorrow. The red metal which is an economic bellwether is currently trading some 1% lower in Asia at $9457/tonne.
- Meanwhile, Chile state owned miner Codelco has offered Chinese buyers copper supply for 2022 at a premium of $105 tonne which is up by 19.3% on the $88/tonne they paid this year. The premium is paid above LME exchange prices for the physical delivery of copper cath-odes into China, the higher premium is as a result of stronger demand for the metal as well as low global inventories.
- Moving over to the US, it will be a quiet data day today other than the U.S. vehicle sales data, which are unlikely to be market-moving. Fo-cus has already turned to the plethora of data and events later this week, which will dominate traders’ attention. The most important will be the FOMC decision, where the start of the taper is anticipated. The Fed is expected to reduce its asset purchases by approximately $15bn per month until it is no longer building its balance sheet. It is a gradual approach that will precede any rate hikes aimed at curtailing inflation expectations.
- While issues on the economic and monetary policy front continue to unfold, it is worth taking stock of developments in Congress as well. Moderate Democrat Manchin has dug in his heels in another blow to President Biden. He has once again rejected the $1.75trln package on social and climate change spending. His main concern is that the reduction in spending is unrealistic, with budget tricks used to reduce the overall spending figure. Manchin anticipates that final spending is likely to be higher and has expressed his grave concerns that this would not be in the country’s interests. So tight is the voting and balance of power within Congress that his vote is needed. For his part, Manchin has urged the Democrats and Biden to pass the $1.0trln infrastructure spending bill now and worry about the rest later, but Biden is adamant that he would like both passed now. If the social and climate change spending does not happen now, it is unlikely it will happen at all. Biden has just committed the U.S. to meet its climate goals at a COP 26 meeting yesterday.
- Meanwhile, Wall St is powering back to record levels and that despite the Fed looking to taper at this week’s meeting. Armed with the benefit of hindsight, where the taper tantrum proved to be a wrong interpretation of what was to come, investors seem less fearful this time, knowing full well that the Fed will not allow the economic recovery to falter at this stage of the recovery.
- In the FX markets, the Zambian Kwacha remained on the back foot at the start of November, extending last month’s losses on the back of scare US dollar liquidity conditions. The local unit closed north of the 17.200 mark according to Reuters data. Meanwhile, the USD slipped off Friday’s best levels as investors responded to inflation data that built the argument for the Fed to turn a little more cautious in its stimulus application. Once it became clear that other central banks would be forced to do the same, the relative trade was questioned, with the BoE this week, the first major central bank to potentially “take action” by tightening monetary policy. For now, the USD remains more stable and is likely to tread water ahead of the FOMC decision due on Wed.
Rand and International FX Commentary
- SA comes back from a long weekend today, with yesterday’s elections completing without much fuss. However, voter turnout was re-portedly very low, and the legitimacy of these elections may come into question. It may be that inclement weather in some parts of the country played a role, or it may just be that disillusioned voters felt like there was no point. They could not vote for the ANC nor felt there was a viable alternative they felt comfortable voting for. For now, the next big event will be the result, and early outcomes are likely to be released today.
- Arguably the bigger news was the collapse of the ZAR through the course of yesterday and overnight. Once again, thin market conditions precipitated higher volatility and greater amplitude in the USD-ZAR’s performance as it trades above 15.46/dlr in early trade while not showing any technical signs of a building reversal just yet.
- Load-shedding, once again, triggered the initial bout of depreciation and came as a timely reminder to voters and investors alike of the heavy burden of reform that is desperately needed in South Africa. Without it, the country will simply struggle to eke out growth or meet its developmental goals. Interestingly, the ZAR’s weakness materialised through a day when the USD itself retreated, suggesting it was more idiosyncratic, affecting SA and the ZAR.
- This makes today’s trading behaviour important. Risk appetite remains generally good. Global equity markets are performing well, the USD’s own strength is being questioned, global volatility levels have not surged, local elections have passed without a glitch, and load shedding has ceased, at least for now. The current bout of ZAR weakness appears overdone. Exporters should enjoy improved levels at which to trade, and this may put the brakes on the current move.
- The big global events of the week still loom. They come in the form of the Fed decision on US monetary policy, the Bank of England doing the same and the US employment stats, all of which hold some market-moving potential. That being said, the ZAR has depreciated sharp-ly already, and it seems that the risk of further ZAR weakness has largely been priced in.