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Zambia Market Watch – Zambian assets rally amid debt resolution optimism

August 17, 2021by Nicholas Kabaso
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Local Market Commentary

  • President Edgar Lungu on Monday conceded defeat in the 2021 presidential elections to opposition leader Hakainde Hichilema. In a tele-vised address to the nation, Lungu said he would comply with the constitutional provisions for a peaceful transition of power and con-gratulated Hichilema. The comments from Lungu marked a U-turn from his protests on Sunday that the election had not been free and fair. With Hichilema being declared the winner and Lungu accepting defeat, this would mark the third time that power has shifted peace-fully from a ruling party to the opposition since the country’s independence from Britain in 1964.
  • Undoubtedly the most significant move in the African Eurobond market yesterday was in Zambia. Yields across Zambia’s Eurobond curve nose-dived on Monday after an official statement released early in the morning revealed that opposition leader Hakainde Hichilema had successfully won the election with nearly 60% of all votes going his way. This landed Hichilema a majority in parliament, which will give the new President a strong mandate to implement structural reforms needed to revive Zambia’s crippled economy.
  • On Monday, Zambia’s 2027 Eurobond yields plunged more than 260bps to end the session at 14.57%, levels last seen prior to the COVID-19 pandemic. However, the most pronounced move was on the front-end of the curve, with the 2024 Eurobond yield shedding 535bps yesterday to close the day at 20.25%. Pulling back the lens, while still elevated relative to its African peers, Zambia’s 2024 and 2027 Euro-bond yields have fallen sharply this year. For context, the 2024 and 2027 Eurobond yields have decreased by more than 10% and 8%, re-spectively, on a year-to-date basis.
  • The bullish bias in Zambian bonds this year is attributed to three main factors, namely, hopes of an International Monetary Fund deal, el-evated international copper prices, and hopes that the Hichilema administration will implement much needed structural reforms that will revive the economy and put the country on a more sustainable debt trajectory.
  • Although the market has turned decisively bullish on Zambian debt, we caution investors not to turn overly bullish on Zambia just yet. We need to see concrete evidence that the new administration is indeed committed to rolling out structural reforms while at the same time securing a program with the International Monetary Fund. If the new government is able to do this, we still expect it to take years for the economy to recover from the damage caused in recent years.
  • Copper fell overnight with the benchmark 3m LME contract shedding 1.35% on the session to close at $9442.00/tonne. This morning we have noted some bargain hunting in the Asian session given the sharp fall yesterday and we have the red metal up just short of 0.5% on the day at $9488.50/tonne into the EU open.
  • The market is heavily headline driven at the moment and short term tactical traders will be finding the current price action testing given the level of volatility.
  • Newswires in the US are awash with coverage of the developments in Afghanistan and it is fair to say that the Biden administration is coming in for some heavy criticism. President Biden addressed these developments in a televised statement last night where he defend-ed his actions, stating that there was no good time to withdraw, that the action had to be taken, that the objectives had been a decade ago. He went on to add that it was regrettable the Afghan army did not make better use of the assistance the US had granted them, ca-pitulating at the first sign that the Taliban were approaching and engaging. He used this as justification that if the army were not ready now, they would not have been in the future and that it was not America’s place to fight the Afghan civil war. While many can sympathise with Biden in wanting to withdraw, how the US withdrew is the point of criticism. The transitional arrangements were inadequate, and the Afghan government’s collapse took place in a matter of days, far quicker than anticipated. This has raised overall levels of geopolitical tensions in the region and Europe, which is bracing itself for another influx of immigrants fleeing the Taliban.
  • Shifting to the FX markets, Kwacha bulls were in control yesterday as the local unit rallied on the back of optimism that opposition leader Hakainde Hichilema would bring a swift resolution to the country’s debt woes after a landslide election win. The ZMW was Africa’s sec-ond-best performing currency against the USD yesterday, up by over 1% to close just south of 19.200.
  • Yesterday, Boston Fed President Rosengren undid some of the damage to the USD that was done by the consumer confidence data last Friday by stating that one more month of strong job growth could prompt the Fed to start tapering as early as Sep. Recall that tapering in itself is not tightening. It amounts to pressing less hard on the accelerator and given the underlying strength to the U.S. economy, the ta-per could indeed be justified. This has helped to stabilise the USD, which will also benefit from a rise in global geopolitical tensions as de-velopments in Afghanistan continue to unfold in a concerning and destabilising way.

Rand and International FX Commentary

  • The new week began with somewhat more risk aversion than where the last ended. The USD steadied after Friday’s data-driven tumble, rising through the session yesterday, while the likes of the Japanese Yen and Swiss Franc also received a haven bid. The ZAR, meanwhile, traded gradually weaker through domestic market hours as EM currencies broadly struggled for traction.
  • Data out of China earlier in the day showed retail sales and industrial production rose less than expected in July amid an outbreak of delta COVID-19 infections, economic pressure which would have been exacerbated in the weeks that have followed. This ultimately highlights risks that all EMs face in the event of slow vaccination drives, while the data yesterday saw SA assets worse hit, given China is one of SA’s largest trading partners. Nevertheless, risk-off trade was broadly felt, with the ZAR ending 0.60% weaker against the USD at 14.8200/$. 
  • Adding to the tentativeness at the start of the week, markets will also have a firm eye on FOMC minutes due tomorrow. Given an unex-pected dovish tone at the last meeting, the minutes may well hold a few other surprises which could bolster the USD in the near term. The eventual end of excessive stimulus by the Fed, and rate hikes later down the line, will ultimately see the end of “easy” money flow-ing to emerging markets. While loose stateside financing conditions will persist for some time still, it is notable that investors have be-come less bullish on EM ETFs in recent months. According to data compiled by Bloomberg, investors withdrew money from US-listed ETFs which buy EM stocks and bonds last week at the fastest pace since September 25, ending four weeks of straight inflows. Meanwhile, ETFs investing in SA assets incurred outflows of $2.3 million due to $4.1 million of outflows from stocks, while bond ETFs still attracted $1.8 mil-lion of inflows. 
  • Recall, this was in the wake of a bumper US nonfarm payrolls print and US CPI data showing annual inflation persisted above the 5%-mark in July, which likely boosted Fed tapering expectations while driving the USD firmer. If the latest CFTC data is also anything to go by, this trend may well persist in the near term, with the data showing the market’s net long USD position continued to increase in the week end-ing August 10. Surprisingly, the net long position on the ZAR increased, albeit marginally, to $0.15 billion from $0.13 billion the week prior, yet was still below the recent peak of $0.26 billion seen in late June. Given the week coincided with significant ZAR depreciation, we may see a slight pullback in the market net long ZAR position; however, the outlook for the USD remains solid amidst all the taper talk. 
  • Overnight Fedspeak has indeed continued to bolster the USD. Boston Federal Reserve President Eric Rosengren has said that another month of solid job gains could satisfy the Fed’s requirements and prompt a September taper announcement. As a result, the USD has surged ahead during Asian trading hours, broadly pressuring EM and major currency markets. The ZAR has continued to trade amongst the weakest in the EM sample of currencies, given its susceptibility to changes in market sentiment, and looks set to stay that way until later today, where US retail sales and industrial production data may offer fresh direction.

Nicholas Kabaso

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