It’s already 2022 and the pandemic, unfortunately, is still raging with no real end in sight. As Omicron becomes the dominant COVID-19 variant, globally, we have seen countries adopt different policies to mitigate infections, while agreeing on the variant’s less harmful nature. Amid the surge in infections, we are starting to see news flow from healthcare experts suggesting that the pandemic is likely post-peak. But as the legendary baseball catcher Yogi Berra once said: “It ain’t over till it’s over”.
Key themes for the week include:
- United States (US) inflation reaches multi-decade highs
- US market in the red
- Oil is back above $80 per barrel
- Russian ruble falls sharply on the back of geopolitical concerns
OMICRON RAGES AHEAD OF WINTER OLYMPICS
According to the World Health Organization’s latest epidemiological update, there was a marked increase in new COVID-19 cases, after 15 million new cases were reported between 3 and 9 January 2022, representing a 55% increase on the previous week. As it stands, Europe and North America are the regions experiencing the highest incidences per 100 000 population, while the Eastern Mediterranean and Africa have the lowest number of reported cases.
Despite the high numbers, the Omicron variant (which is rapidly replacing other variants) has been shown to be less severe when compared to previous strains. A recent South African study of the Omicron variant by the Steve Biko Academic Hospital postulates that current trends point to an eventual decoupling of COVID-19 cases and death rates. The European Medicines Agency, this week, expressed reservations around a fourth vaccine; citing increased natural immunity from Omicron and the likelihood of the pandemic transitioning to its endemic phase.
The spread of Omicron has led to somewhat divided responses globally, with the Netherlands, for example, instituting harsh restrictions, while the milder restrictions put in place in Wales in late December are likely to be relaxed soon. China, on the other hand, retains its ‘zero-COVID’ policy. The goal of their healthcare interventions is to eradicate the virus. China’s Xi’an Province is currently under the harshest restrictions following China’s first outbreak, including an almost total ban on driving. A growing outbreak in Tianjin, a key port city close to Beijing, is also leading to restrictive interventions in a bid to suppress transmission. The backdrop of China’s reaction is the Beijing Winter Olympics, which is scheduled to start on 4 February 2022.
DATA IN A NUTSHELL
This week saw US inflation soar to 7%, its highest level since 1982, as pandemic-related supply and demand imbalances, along with stimulus intended to shore up the economy, pushes prices up. This sets the stage for the start of Federal Reserve (Fed) interest-rate hikes as soon as March.
The core price index, which excludes the volatile categories of energy and food, gained 5.5% in December, year-on-year, which was larger than the November increase of 4.9% and is the highest increase since 1991. Despite the faster annual pace, month-on-month price gains dropped to 0.5% between November and December, down from 0.8% the previous month.
The largest contributors to US inflation figures have been the rising cost of home rentals and other accommodation, as well as rising prices for used vehicles. Used car prices continue to surge, gaining 3.5% from the previous month and a massive 40% from a year ago.
In contrast to the Consumer Price Index (CPI) numbers, the US Producer Price Index (PPI) slowed in December as the cost of goods fell and is perhaps a signal that stretched supply chains were starting to recover, and possibly that inflation has peaked. PPI rose 0.2% month-on-month in December, which was below the market’s expectation of 0.4%. This meant that the yearly figure for PPI, 9.7%, was also below the 9.8% the market was expecting.
JSE OFF TO A GOOD START FOR THE YEAR
The US equity markets have been off to a sketchy start to the new year as the S&P 500 lost
-2.4% and the IT-heavy Nasdaq Composite retreated by -4.4% in the first week of the year. The indices continued to slide this week, with the S&P 500 giving back -0.2% and the Nasdaq Composite returning -0.9%. This means that year-to-date, US equity markets are in the red. One of the biggest gainers of the week, Taiwan Semiconductor Manufacturing, reported a record quarterly profit on the back of increased semiconductor demand. The stock responded by appreciating 4.5%. US airline companies also performed admirably, with Boeing gaining 2.5% on the back of news that the aircraft manufacturer may be able to resume business in China later this month. Delta Air Lines also gained 2.1% after reporting good earnings on the back of strong holiday-travel demand.
Locally, the equity markets have had a strong start to the year, with the JSE All Share Index gaining 2.8%, on the back of strong performance from financials which were up 5.6% and resources continuing from where they left off last year, gaining 5.8% year-to-date. Resources made substantial gains this week, with the JSE FTSE Resource 20 Index appreciating 4.1%. Both the financial and industrial indices were also firmer this week, up 2.0% and 1.5% respectively. The top performer of the week was platinum group miner, Sibanye-Stillwater, which jumped 14.2%, followed by Naspers, gaining 11.3% and Prosus up 9.5%, and Sasol is also having another stellar week, returning 9.3%. On the other end of the spectrum, the main laggards for the week were luxury goods retailer, Richemont which lost 3.5% and food services business, Bidcorp, losing 2.6%.
West Texas Intermediate (WTI) futures climbed from $78 at the start of the week to $82. You will recall that oil prices spiked amid the European and Chinese energy crises in October 2021, but subsequently slumped to $65 in December as the market overestimated the negative impacts Omicron could have on demand. According to the Energy Information Administration, US crude inventories fell by 4.6 million barrels last week to 413.3 million barrels, their lowest levels since October 2018, and the tight supply could see oil continue to reach multi-year highs.
Gold has traded mostly above $1 800 per fine ounce this year, with further impetus possibly coming from the recent US inflation print of 7%. Downside risks to gold could come from a hawkish FED and US real yields. Real yields on 10-year US Treasuries increased to -0.74% after spending most of 2021 below -1%.
Copper prices have remained surprisingly robust compared to other important industrial commodities. Copper futures are trading at $4.55 which is only 5% below its May 2021 peak. Several factors have contributed to the improved copper price. China’s intention to invest in its economy to meet its growth expectations could lead to increased demand in early 2022 and provide a boost for the copper price in the near-term.
RUSSIAN RUBLE FALLS ON GEOPOLITICAL TENSIONS
Despite the increased CPI numbers, the US dollar surprised by continuing to depreciate on Thursday to a two-month low. The US Dollar Index, which measures the dollar against a basket of other currencies, fell a further 0.2%, losing a total of 1.1% for the week. Market participants have suggested that as much of the Fed tightening is already priced in for the year and that expectations for longer-term hikes are low, the dollar’s value has been kept in check.
The Russian ruble gave up its gains from earlier in the week and fell sharply on Thursday, together with the Russian government bonds, which fell to a more than three-year low on the back of growing geopolitical tensions around Moscow’s standoff with the west. The Russian Deputy Foreign Minister, Alexander Grushko, said that Washington’s rejection of Moscow’s key security demands was leading talks to a dead end. The talks thus far have failed to reach an agreement on the Ukraine crisis and Moscow’s demands that NATO pull back from central and eastern Europe. The ruble was 1.4% weaker against the dollar, falling to 75.51 rubles to a dollar. While the ruble has strong fundamentals, owing to high commodity prices and central bank rate hikes, it has been under pressure since October, as the US expressed concerns around Russia’s military presence near Ukraine. The yield on 10-year Russian government bonds rose to 8.89%, a level last seen in late 2018.
The rand is trading at R15.42/$, R17.69/€ and R21.16/£.