EUROBONDS PERFORMANCE: Zambia’s dollar bonds continue to be elevated to levels of 16.8% – 17.9% for its 2022 to 2027’s as local currency fixed income yields pay highs of 27.5% to 30.5% in the primaries. The market has seen off – shore swap yields come off in the last month. Our analysis is more biased towards subdued divestment in the near term.
CURRENCY STRENGTHENING: Currency short term trading range for the Kwacha remains 12.65-13.15 for a unit of dollar, while the wider medium term range is set at K12.45 – K13.45. A key level to breaking the downside is 12.85 where the market has persistently hinged on for a week now. In the month of June the markets have seen a significant positioning flurry around 12.85 supported by tight market liquidity that has triggered Bank of Zambia presence in Open Market Operations (OMO) to manage cash levels in the system.
TIGHT KWACHA LIQUIDITY: With tax payments falling due in the coming weeks were provisional and mid-month obligations an estimated 2.3 yards worth of Kwacha (K2.3 billion) is expected to flow out of the system and will likely manifest in increased dollar demand. With the net short position signaling players positions in Kwacha which could fuel dollar conversions causing a rally in local currency to 12.5 levels which we attach a 60% probability. The exchange rate remains vulnerable to strengthening in the medium term. Energy demand has been bullish in the week absorbed by the long dollar position brewing a rally to K12.825 after having opened at K12.875.
TREASURY BILL AUCTION HAIRCUT: In the debt sale held on 04 July, the central bank only sold K215 million of the K950 million with yields unchanged in all tenors but the 6 month which rallied 50 basis points to 16%. Subscription haircuts have weighed the Zambian domestic money markets with 14 out of 16 debt sales undersubscribed widening a funding gap of the government’s target for the year. It is this continued rise in the auction deficit that drives a view that the budget deficit on a cash basis is likely to widen to 8.8% in 2019, 230bps above the government’s target of 6.5%.
GLOBAL RISK SENTIMENT
MACROBACKDROP THEMES: Three majors themes have dominated the global markets this year with respect to economic growth namely:- subdued global growth, Sino -US trade impasse and tightening financial conditions manifesting in deterioration of credit over the last 2 -months. There has been a rise in geopolitical tensions particularly between the United States and Iran exacerbated by the recent oil tanker attack by Iran in the gulf, the gunning down of a US surveillance drone by Iran, suspended military attacks on Iranian targets as well as sanctions slapped on Iran. These geopolitical tensions have added to the stock of challenges facing the global economy in 2019.
MAJOR CENTRAL BANKS RATE CUT POSTURE: Central bank posture is biased towards monetary policy easing with the likes of New Zealand, Australia, Japan, Europe and the United States expected to implemented this as early as July. The outlier in all this has been the Bank of England that has been dovish with hopes of a hike in light of Brexit concerns. However Mark Carneys recent comments seem to be following suit, the US Fed stance hinted by its Chair Jerome Powell. While interest rates in Europe and Japan are already very low (with most in negative dubbed zombie bubbles), there is limited scope for cutting rates. The US Fed does have a 250 basis point latitude to work with before they can consider using quantitative easing as a tool again. This is the most likely route because when central banks looking to policy easing in the event of limited latitude, the quantitative avenue is usually the best option.
Global market have priced in 3 rate cuts at 25 bps each to year end with the first cut as early as July. The sideline meetings of the G20 suggest a risk on environment with the US – China trade impasse mood which most believe still leave the medium to long term with uncertainty. Trump seems to be determined to use trade as a weapon to bulldoze the US agenda globally. The new wave of threats is on Europe over aircraft subsidies which rattled the summit.
A positive of the interaction of Xi Jinping and Trump was the easing of sanctions on Huawei Technology who can now transact with US firms.
