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Local Market Commentary
- Vice-President Mutale Nalumango in parliament yesterday said that the country’s total debt to China stood at $5.75bn at the end of Q2. Naulumango added that Zambia, which is targeting an International Monetary Fund by Q1 2022, aims to reach a staff-level agreement with the fund before the close of the year. Meanwhile, the Group of 20’s so-called common framework for debt treatment will continue to underpin Zambia’s debt restructuring while the government sees a deal with external creditors next year. Nalumango also indicated that a restructuring of Zambia’s public debt would be done transparently, with no favouritism across creditors, adding that the country’s debt stock would be periodically audited. Note, Chinese debt remains a hurdle to ongoing debt relief talks, given various reports that it may be more than actually reported.
- In a bid to spur the growth of the world’s biggest free-trade area, the African Development Bank said that it will support trade valued at $7bn over the next five years. The bank will guarantee loans given to companies to sell their products across the continent in a move that will facilitate the development of the African Continental Free Trade Area that went into effect at the start of this year. The bank indicat-ed that it will back about 2,000 transactions and will seek to narrow the trade financing gap that has widened further following the coro-navirus pandemic, which devastated demand and made it difficult for companies to meet credit conditions set by local and foreign lend-ers.
- Copper prices rose through Thursday’s trade as buying increased ahead of China’s reopening following a week of holidays, a slightly weaker USD and receding concerns about the U.S.’s debt ceiling. Furthermore, there are still disruptions to some copper production in Peru’s Glencore Antapaccay mine.
- Chile has taken advantage of the higher copper prices. Copper exports rose in September as miners took advantage of the higher prices to lock in strong revenues. Copper exports for the month of September totalled $7.429bn, which is an increase of some 18.5% vs a year earlier. This will assist the industry recover from strikes at mines owned by mining giant Codelco.
- Moving over to the US, labour market data so far this week has kept with the theme of a tightening and recovering labour market. The private sector data was impressed by beating expectations, while the weekly jobless claims showed improvement but were more of a mixed bag. With infections and lockdown restrictions still a feature, the economy has not recovered to full potential capacity, but the trends are moving in the right direction. The definitive view will be generated from the payrolls data later today.
- At its September policy meeting, the Fed confirmed that it would likely begin tapering stimulus before the end of this year. Chairman Powell said that the central bank would complete the taper by mid-2022, paving the way for rate hikes soon after. Note that much of the Fed’s hawkish assessment was built on the assumption that the U.S. economy and the labour market would continue to recover strongly into the end of the year. Therefore, in the unlikely event that the expected improvement in economic and labour market conditions does not materialise, the market may need to reassess its recent positioning. Against this backdrop, the market will digest the upcoming Sep-tember employment report, which will help investors position more completely for prospective monetary tightening.
- Senate Democrat leader Chuck Schumer confirmed on Thursday that a short-term debt ceiling deal was struck with the Republicans until early December. The Democrats now have a few more months to negotiate a smoother passage to a bi-partisan agreement. However, the Republicans have quickly warned that the Democrats can achieve or suspend the debt ceiling through the reconciliation process with-out any assistance from the Republicans that wish to distance themselves from the Democrats’ spending ambitions. This will offer mar-kets a reprieve, although it constitutes little more than kicking the can down the road.
- In the FX markets, the Zambian Kwacha is expected record further losses against the USD next week as demand for hard currency contin-ues to outweigh supply. Meanwhile, the USD has continued to trade in a non-comital manner ahead of non-farm release payrolls data this afternoon. An out of 500k has already been priced in, as has an unemployment rate of 5.1% and wage increases of 4.6% y/y. The spread of expectations was again wide, with the highest expectations at 700k and the lowest at just 250k. The dust has yet to settle on the recovery trajectory amid assistance programmes that are ending, cautious businesses and ongoing covid infections. Clearer direction will likely follow through the afternoon session and the early part of next week.
Rand and International FX Commentary
- The ZAR led the charge yesterday before paring gains in late afternoon trade as a pick-up in global sentiment saw major and developing-nation currencies roaring back against the USD. However, advances in the EM FX space far outpaced those of other major currencies, leaving the USD trade-weighted index (the DXY) holding steady within its recent 94-94.50 range. With EM currencies generally taking a beating in the lead up to today’s US nonfarm payrolls release, the return of risk appetite yesterday suggests the market sees recent moves as overdone for some riskier currencies. Given that Fed tapering at some point into the end of the year is well priced into the USD at current levels, developing nations, which hold greater expectations for near term rate hikes and those still receiving support from higher commodity prices, could yet see some near-term currency gains.
- However, that the USD index remained supported yesterday suggests the return of risk appetite may equally have been uncalled for. Re-gardless, the ZAR’s higher beta status shone through as it led the EM basket of currencies for most of the day. The local unit remains sub-ject to swings in global sentiment and ultimately closed 0.95% stronger on the day at 14.9500/$. Domestically, rising Inflation expectations off the back of higher energy/oil prices have begun to drive a more hawkish outlook for the SARB. This could see the ZAR hold up better than expected when the US Federal Reserve eventually announces a tapering of its asset purchases, that’s if the SARB is able to keep up with rate hike projections, which ultimately depends on SA’s economic performance going forward. While the SARB remains committed to its inflation-targeting mandate, dovish MPC members will be hard-pressed in hiking rates too quickly while the domestic economy re-mains in a weak state.
- As for recent developments, the state-utility Eskom announced bouts of overnight load shedding yesterday, taking place last night and Friday, due to reserves being depleted after multiple generation unit breakdowns. While not as economically damaging as prior bouts of load shedding, the news still stands as a potential precursor to further unstable electricity supply in the near term. On a positive note, the UK eased entry rules for 47 countries, including South Africa, which were subject to the most stringent conditions and COVID-19 proto-cols. The changes will take effect from Monday 11 October and should bring a significant boost for South Africa’s tourism industry.
- Over to the markets, currency markets are off to a less buoyant start this morning despite Asian equities trading broadly up as Chinese markets return from a one-week break. As for data, a gauge of Chinese services activity rebounded significantly in September, which could help cool global growth concerns in the day ahead. However, the official US labour market report will undoubtedly dominate the fo-cus heading into the weekend. Solid hiring in September could allow a break higher for the USD, while a weak jobs report will unlikely de-rail Fed plans to begin reducing monetary support to the economy, suggesting the USD will remain supported in the near term.