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Local Market Commentary
- Energy Minister Peter Kapala told lawmakers on Friday that state-owned power utility ZESCO had a total debt portfolio of $3.5bn by Sep-tember 30. Moreover, ZESCO had borrowings of ZMW 30bn ($1.78bn) by the end of 2019, according to its annual report. Meanwhile, ZESCO had recorded $400mn in losses between 2018 and 2019 due to the local currency depreciation. Kapala added that the government is set to present its report on power tariffs by month-end, adding that the country is set to restructure ZESCO to start liquidating its debt. Note earlier, this month Finance Minister Situmbeko Musokotwane said that Zambia’s external public debt had grown uncontrollably over the past decade to almost $15bn by June this year. Of that, about $2bn was parastatal debt.
- A cash squeeze is presently underway in the copper market as the premium that spot is demanding over its 3m counterpart on LME is trading at $1103.50/tonne versus $55.00/tonne a week ago. Levels this high were last seen in 1994 and it shows a severe tightness in the market. LME inventories have fallen by more than 90% over the past two months after a surge in orders took out most of the near term supply. Physical supply is also falling in China and the United States which does suggest the near term price pressures will be embedded.
- Equally, we see Peruvian copper supplies threatened. After negotiations failed with the government, a community will block a key mining road used by Las Bambas copper to get its product to market. Las Bambas is the nation’s 4th largest copper mine.
- Moving over to the US, productive data released yesterday disappointed. It was soft across the board, whether one looked at industrial production or manufacturing production. Motor vehicle production was also way down, and while hurricane Ida was to blame for some of the underperformance, that only reflects half the picture. Between the chip shortages, logistical supply chain constraints and weather dis-ruptions, the economy remains far below its productive potential and has raised questions around whether it would be appropriate for the Fed to press ahead with tapering before the end of the year. The deteriorating supply chain environment challenges the argument that these disruptions could be temporary and the difficulties companies are having in delivering their products to market on a large scale.
- Notwithstanding expectations for the Fed to begin tightening policy in the coming months, the U.S. housing market continues to soar. The number of housing starts in the U.S. has hit record highs this year and remain buoyed well above historical levels as consumers con-tinue to take advantage of the favourable lending conditions. While the housing boom will persist in the months ahead, some alarms have been sounded that the housing boom is running too hot. Indicators such as the Fed’s 2005 Housing Model has flagged bubble risk. That said, while housing prices are once again at troubling levels, the risk of a U.S. housing bubble is not yet an immediate concern.
- Finally, an update on the Biden $3.5trln spending plan. Within the Democrat party, moderate Democrat Manchin has had some misgivings about the sheer size of the spending programme. Without Machin, passing the bill becomes difficult, and it is therefore imperative that the Biden administration appeases his concerns and unifies the Democratic party around these issues. The compromise will likely be a much smaller spending package and one that is more sensitive to the tax and debt implications. However, internal party politics within the Democrats will need to be tackled before targeting such enormous spending packed becomes realistic and plausible.
- In the FX markets, the Zambia Kwacha is expected to remain steady this week even as demand for hard currency, mainly driven by agri-cultural imports, outweighs supply. This is so because of the FX liquidity injections by the central bank recently. Meanwhile, the USD has come under some pressure following much weaker than expected data that was released yesterday. Investors are questioning whether they have been too quick to price in the chance of tapering, given the many growth challenges that persist. The recovery from lockdowns will be bumpy and fraught with fits and starts. The Fed might find itself debating the timing of the taper and may err on the side of taper-ing more slowly than previously anticipated, which could result in other major central banks reducing monetary stimulus faster than the Fed. For now, the USD is on the defensive and could depreciate a little further before it stabilises.
Rand and International FX Commentary
- After four straight sessions of gains, the ZAR came under a bout of weakness on Monday as appetite for riskier assets was lacking com-pared to the past week, with global inflationary concerns triggering a rotation into safer currencies. Weak Chinese data earlier in the day showed that the nation’s growth concerns could be materialising, further weighing on the local currency. As such, the ZAR managed to give up much of Friday’s gains as it closed 0.55% weaker at 14.6800/$. However, the ZAR was spared from losses of 1.35% as it hit 14.8000/$ in intraday trade. While the USD began the week more supported than where it left the last, US industrial and manufacturing production weighed on the greenback later in the session, causing it to pare all trade-weighted gains on the day.
- While markets got off to a risk-averse start at the beginning of the week, upside potential remains should appetite for emerging market assets pick up once again. Coinciding with last week’s gains for EM currencies, broader emerging market asset classes also made a turn for the better. Specifically, US-listed ETFs which invest in EM stocks and bonds registered the first week of inflows in four in the week ending October 15. According to data compiled by Bloomberg, ETFs investing in South African assets saw inflows of $9.4 million, with $6.3 million of the inflows going to equities and $3.1 million to domestic bonds.
- All in all, the outlook for emerging market currencies remains, in part, dependent on overall risk appetite and the relative returns that they offer. Should expectations of global monetary tightening begin to simmer, we may well see further trends of inflows into emerging markets. However, with inflation remaining a concern for global investors and seen to be the driver of future tightening by major central banks, emerging markets with more fragile economic recoveries and the inability to pare back supportive monetary policy as quickly run a greater risk of market volatility. As a result, even with relatively higher yields on offer, emerging market currencies will begin to lose the support which has resulted in much of their resilience through the earlier stages of this year, especially holding true for the ZAR.
- While the day ahead is limited in terms of data releases, the global data card picks up tomorrow with highly anticipated inflation prints out of the UK and Eurozone area, and including the domestic inflation print for September. Meanwhile, the USD has continued to trade weaker overnight after yesterday’s US data provided further evidence that supply constraints are inhibiting growth. As a result, emerging markets have been offered some reprieve in early morning Asian trade, with the ZAR erasing almost all of yesterday’s losses. However, with anticipated inflation prints waiting in the wings, this does have the potential to hold back a sustained return of risk appetite should it bolster bets that other DM central banks will need to act more hawkishly in the coming months.