A series of market events ranging from market euphoria to liquidity tightening has clouded the Zambian market this week. Starting the week with a new finance Minister was a shocker to the markets sending the worst performing frontier market bonds to most preferred overnight. China continues to impact the base metal markets as Brexit risks creep in thick as deadline draws nigh.
MARKET EUPHORIA: An autopsy of Zambia’s Finance Ministry latest appointment that saw former central bank Deputy Governor appointed to head the fiscal unit of government. This is the second central banker to be appointed to the fiscal management side. The dollar bond markets jeered the appointments in a 129-229 basis points rally on Zambia’s 2022, 2024 and 2027 eurobonds. The market experienced euphoria as the international markets absorbed information of what most analysts dubbed long overdue change. Zambia grapples with structural issues ranging from rising debt and a widened fiscal deficit. Dr. Ng’andu is a season central banker and the longest serving deputy Governor and has been at the center of financial stability in an 18 commercial bank market.
Some analysts courted reveal that the new finance Minister is not new to offshore players as he has answered most of their questions during investor calls in his previous life and crossing over to the fiscal side has excited most bond holders.
“This euphoria in the dollar bond markets has been seen before just as when the outgoing finance Minister was appointed the markets still jeered. There is more than just appointments but structural issues have to be addressed,” Munyumba Mutwale Managing Partner at Nikiwa Capital said during a market update on MoneyFMs Behind the Markets program.
T-BILL SUBSCRIPTION FORECAST: Factoring in the cash markets we do forecast a haircut in the 15th Treasury bill auction to be held this Thursday. We don’t expect this auction to be decently subscribed and yields still remain fairly elevated with your 9 month attractive at 25.25% and 1 year at 26.5%. There is very little latitude for yields edge higher because the Bank of Zambia will be definitely looking at managing interest rates. However after tax yields remain slightly under water compared to swap and non deliverable forward rates denting appetite for Kwacha paper.
CASH MARKETS: Zambian cash markets remain fairly short with the central bank in Open Market Operation to inject liquidity. This cash tight position has on the upside supported the exchange rate to 12.55 so far for a dollar and with the expiry of the tax season on the 16 July, trading range expected for the local currency remains 12.45-12.85 for a dollar. Kwacha vulnerability for further rallies is steadily fading as no additional demand for the local unit is forecast.
INTERNATIONAL
CHINA FISCAL SPENDING: China’s fiscal spending rose 10.7% in H1 linked to stimulus as fiscal revenues grew 3.4%. Fiscal spending grew faster than revenue growth which is a very good base for investment. This priced in to the base metal markets boosting London copper rally to $5,985 a metric ton as its rise 0.3% in Asian trade on the Shanghai Futures Exchange (SFE) to RMB46,446 ($6,872) a metric to. London aluminum was flat as nickel climbed 0.4% while Zinc slid 0.1%.
STERLING SAGS: The Sterling (GBP) is sagging as it weighs in Brexit risks associated with a euroskeptics Boris Johnsons, election to head the Conservative party and could be the next British Prime Minster as early as this monthend. Other drivers of a weaker pound include the US China trade war which Mark Carney tagged as top risks shadowing the British economy.