The world seems to be jumping from one catastrophe to next, first with COVID-19, and now with the Ukraine-Russian war. With these calamities taking centre stage, other events, risks and considerations have been overshadowed and pushed to the back burner.
Key themes for this week include:
- COVID-19, inflation and interest rates, and the China-Taiwan debacle, still remain relevant
- Producer inflation in eurozone breaks new record
- Commodity prices continue to soar
- Russian ruble tumbles to record low
ON THE “BACK BURNER”
As all eyes are focused on the Russian-Ukraine war, other events are taking a back seat for the time being. They are, however, still important considerations in the geopolitical, socio-economic and financial realm.
COVID-19: While it may not be the key event anymore, or at least for now, the continued battle against the virus, and subsequent economic impacts and recoveries remain relevant as investors navigate troubled waters. While the World Health Organization noted that global cases are on a decline, many countries are still seeing the effects of COVID-19 on their economies and individuals alike. While some countries, such as Australia, finally welcome vaccinated travelers again and as the globe sees a 16% decline in new reported cases, some regions are struggling to get a handle on continuous outbreaks. An increase of 32% in weekly cases were reported across the Western Pacific region. Hong Kong requested assistance from Mainland China, as COVID-19 cases overwhelmed hospitals over the past week. Meanwhile, containment strategies continue to weigh heavily on the Chinese economy, with the world’s second largest economy is seeing a decline in its services sector, yet again.
THE UNITED STATES (US) FEDERAL RESERVE (FED) ON INTEREST RATES: While many argued that the war in the Ukraine might deter the Fed from hiking interest rates, Fed Chair, Jerome Powell, made it clear on Wednesday that the Bank will proceed with its plan to hike rates in March, albeit in a more cautious manner. We expect to see a 25 basis point hike, as opposed to the original 50, this month. The Fed chief, however, said he was ready, if needed, to use larger or more frequent rate moves if inflation does not slow, and may over time need to push rates to more restrictive levels of above 2.5%. This would slow economic growth rather than simply stimulating it less robustly. Inflation is currently triple the Fed’s 2% target and has become a prime political concern for the Biden administration and members of Congress. Powell also proceeded to note that the price pressures are “not as transitory as we had hoped…other mainstream economists and central banks around the world made the same mistake. That doesn’t excuse it, but we thought these things would be resolved long ago.” The Ukraine-Russian war is expected to further exacerbate inflation concerns as commodity prices skyrocket.
CHINA-TAIWAN TENSION: There is some speculation that the Ukraine-Russian war dealt a blow to China’s ambition to annex Taiwan, but the matter is far from settled. Tensions continue to simmer beneath the surface. On Wednesday, China denounced a visit by a US delegation to Taiwan as the island’s president, Tsai Ing-wen, vowed to work more closely with allies in response to what she called China’s growing military threat, while the Chinese Foreign ministry spokesperson, Wang Wenbin, was quoted as stating, “The attempt by the US to show support to Taiwan will be in vain, no matter who the US sends…the Chinese people are firmly determined and resolved to defend national sovereignty and territorial integrity.” The situation is fragile at best, and will certainly affect the markets, as it unfolds.
DATA IN A NUTSHELL
European annual producer inflation hit a record high of 30.6% in January, compared to 26.3% in December and was well above market forecasts of 27%. Energy prices soared by 85.6% and were once again the biggest contributor to inflation. Meanwhile, the region’s fell to a record low of 6.8% in January, down from 7% in December and below market forecasts of 6.9%. The recovery in the labour market is gaining momentum, as countries start to ease Omicron restrictions.
US initial jobless claims decreased by 18 000 to 215 000 in the week ended 26 February. It was the lowest number since the start of the year. On a non-seasonally adjusted basis, initial claims fell by 21 285, from the previous week, to 194 693.
Taking a look at the United Kingdom (UK), IHS MARKIT/CIPS UK Manufacturing Purchasing Managers Index (PMI) crept up to a three-month high of 58 in February, up from its four-month low of 57.3 in January. Domestic demand, fewer raw material shortages, and easing global supply chain issues allowed production to rise at its highest pace in seven months.
South Africa’s trade surplus narrowed to R3.55 billion in January, from a downwardly revised R29.02 billion in December 2021. It was the smallest trade surplus since a shortfall was recorded in April of 2020. February exports tumbled by 16.1% from a month earlier to R130.1 billion, amid lower shipments of precious metals and stones, vehicle transport and equipment, mineral products, and machinery and electronics. On a positive note, the seasonally adjusted Absa PMI increased to 58.6 in February, up from 57.1 in the previous month. The latest reading pointed to the seventh consecutive month of expansion in manufacturing activity, and at its strongest pace since March of 2007.
EUROPEAN SHARES DIP, WHILE MOSCOW EXCHANGE SUSPENDS TRADE
Major bourses in Europe fell into negative territory on Thursday, with the DAX dropping 0.7%, underperforming its peers, as traders follow the ongoing crisis in Ukraine and while soaring commodity prices support the mining and energy sectors. On the earnings front, Germany’s national airline, Lufthansa, said it could not provide a detailed outlook for 2022, due to the war in Ukraine and the pandemic, while Telecom Italia pivoted to an €8.6 billion ($9.5 billion) loss in the fourth quarter of 2021 on impairments, as it prepares for a spinoff in its landline network. British insurer, Aviva, missed earnings expectations.
The Bank of Russia kept stock trading at the Moscow Exchange suspended on Thursday but noted that a limited range of operations will be available and that it would make a statement about future operations on Friday. Authorities suspended trading for a fourth consecutive day to protect Russian assets from sustaining sharp losses amid a series of harsh sanctions imposed on Russia for its invasion of Ukraine.
US stock futures were little changed early on Thursday after Wall Street rallied overnight, as Fed Chair, Jerome Powell, affirmed that the Bank will take a measured approach to hiking interest rates. Futures tied to the three major indexes fluctuated between small gains and losses. On Wednesday, the DOW added 1.79%, the S&P 500 gained 1.86% and the NASDAQ was up by 1.62%.
The UK-based FTSE 100 reversed earlier gains to trade slightly below where it started on Thursday, after rebounding by 1.4% in the previous session, as losses in banks, and travel and leisure stocks offset gains in basic resources, amid the ongoing war in Ukraine. On the earnings front, London Stock Exchange Group increased dividends, stating the 2022 outlook looked upbeat. They said the integration of Refinitiv was on track.
The JSE FTSE All Share index gained close to 1% on Thursday, to touch a new record high of 78 297 points on Thursday, supported by rising prices of commodities, notably oil, gold and platinum group metals, due to the ongoing conflict in Ukraine.
Brent crude futures briefly topped $119 per barrel on Thursday, their highest level since May 2012, on fears of further supply disruptions from sanctions imposed on Russia. The US took aim on Wednesday at Russia’s oil refining sector with new export curbs and it targeted Belarus with extensive new export restrictions. The US has, however, stopped short of targeting Russia’s oil and gas exports amid concerns over energy prices. The expanded Organisation for Petroleum Exporting Countries, the OPEC+ alliance, that includes Russia, also stuck to a planned output increase of 400 000 barrels a day in April, despite the market turmoil brought on by the war. Moreover, US crude inventories continued to decline, with stocks at Oklahoma’s Cushing Crude Hub dropping to their lowest levels since 2018.
Gold crept above $1 930 an ounce on Thursday, after falling almost 1% from a near 13-month high in the previous session. Investors are balancing geopolitical risks and adjusting their expectations on how fast central banks will raise interest rates. While the conflict between Russia and Ukraine has added to inflationary risks and growth concerns, therefore supporting gold, higher interest rates raise the opportunity cost of holding onto the non-yielding bullion.
Newcastle Coal Futures broke another record high at $400 per tonne and are now up more than 100% since the beginning of 2022. Mounting sanctions on Russia have led to an international energy crunch and exacerbated concerns over the commodity’s supply. Germany is poised to create coal reserves for electricity power plant operators, while Italy announced it could reopen some closed coal plants. Asian customers have also been scrambling to find alternative supplies to replace Russian coal. Aside from Ukraine headlines, investors were already bullish on coal since early 2022, amid supply disruptions in top exporting countries such as Indonesia and Australia.
RUSSIAN RUBLE AT RECORD LOW
The Russian ruble (₽) tumbled to a record-low of ₽118/$ on Thursday, as Western sanctions continue to pressure Russian assets. Rating agencies, Fitch and Moody’s downgraded Russian sovereign bonds by six notches to “junk” status. Over the week, Western allies largely limited Russian entities’ ability to transact internationally, after agreeing to remove key Russian banks from the SWIFT Interbank system and freezing the assets of the country’s central bank. The tumble came despite strong efforts of stabilisation by the Central Bank of Russia, as the bank raised its key policy rate to 20% from 9.5%, banned foreigners from selling Russian securities, and mandated Russian brokers to charge 30% in commission to individuals for the purchase of foreign currencies. Meanwhile, the Russian banking system’s liquidity shortage widened to ₽6.9 trillion, as citizens continue to rush to withdraw cash.
The euro continues to feel the pinch, weakening further, to below $1.11, its lowest level since May 2020. The outlook of the eurozone’s economy deteriorated during the week and Western sanctions raised uncertainty on the European Central Bank’s policy path. While growth will likely take a hit from the war, hopes that inflation would start to peak in the early part of 2022 faded as the energy crisis threatens increased fuel costs.
The British pound depreciated below $1.34, not far from a ten-week low of $1.327 hit on 2 March 2022, as investors sought shelter in safe-haven currencies amid escalating conflict in Ukraine. The dollar index stabilised around 97.5 on Thursday, after hitting a 20-month high of 97.83 in the previous session, after Fed chair, Jerome Powell, affirmed that the central bank will take a measured approach to hiking interest rates. Meanwhile, investors were kept on edge as supply issues were exacerbated by the events of the last week, which drove oil prices to multi-year highs, adding to inflationary risks and growth concerns.
The South African rand was trading around R15.30/$, remaining close to its lowest levels since 7 February, as investors sought the safety of the dollar, not only because of Russia-Ukraine tension, but also over concerns of the impact of sanctions imposed against Russia will have on the global economy. Meanwhile, higher precious metal prices, the improved fiscal outlook in South Africa’s annual budget, and bets of further monetary policy tightening by the South African Reserve Bank, curbed further losses.
The rand is trading at R15.25/$ R16.81/€ and R20.31/£.