The European Union’s (EU) foreign policy chief, Josep Borrell, characterised Russia’s military aggression towards Ukraine as Europe’s most serious threat since the Cold War. This week we explore the Eurasian conflict that has the world holding its breath.
Key themes for the week include:
- Putin’s game of chicken
- Positive United States (US) earnings news
- US inflation heats up
- Materials rally
- Hawks push the US dollar higher
We are approaching the fourth month since the Russian government (commonly known as the Kremlin) mobilised close to 100 000 troops, with artillery, towards the Ukrainian border, creating a diplomatic quagmire for both Europe and North America. According to recent estimates, Russia’s military contingent against Ukraine has grown to 140 000 troops, and includes a presence along Ukraine’s eastern border, the Black Sea, and within Belarus, a country that is allied to Russia and shares a border with both Russia and Ukraine.
The Kremlin’s political brinkmanship comes in response to the Ukrainian parliament’s consistent moves to grow its relationship with the North Atlantic Treaty Organisation (NATO) and its ultimate intention to join the alliance alongside 30 other countries from North America and Western Europe. Vladimir Putin, the leader of Russia, identifies Ukraine as one of the former Soviet Union’s key republics, and likely sees the slow encroachment of NATO as an attempt to shift global geopolitics in favour of the West.
While Ukraine has received some support from NATO allies including armaments, training, cyber security, and intelligence support, its government believes that the aide so far has been insufficient to rival Russia’s more advanced military capabilities. Aside from direct contributions, recent diplomatic activity in support of Ukraine includes the US Senate, which is preparing a punitive sanctions bill meant to discourage a Russian invasion. Also, this week, France’s President Emmanuel Macron met with Putin to calm waters, but the outcome of the dialogue did not indicate any change in Putin’s stance against NATO’s expansion.
Part of Russia’s leverage with the West is Europe’s dependence on Russian energy, which is expected to increase once the completed Nord Stream 2 gas pipeline comes online. Germany, for example, imports most of the natural gas it consumes, and Russia accounted for 32% of their gas imports in December 2021. The market has also been looking to the second and third order impacts of a Russian invasion scenario which could include a spike in energy and platinum prices, while global beverage prices could be impacted by an interruption in Ukraine’s wheat exports. Geopolitically, we have previously mentioned the long-run strategic importance of Western-Russian relations as the latter acts as buffer between China and continental Europe.
DATA IN A NUTSHELL
In the US, consumer prices accelerated to 7.5% year-on-year in January, exceeding market expectations of 7.3%. This was the highest year-on-year advance since February 1982, and is attributed to robust demand, labour shortages and supply bottlenecks. The biggest contributors remain energy and gasoline prices which advanced 27% and 40% respectively compared to a year ago. Core inflation, which excludes volatile energy and food prices, advanced to 6%, also beating market expectations. The latest print continues to point to inflationary pressures and supports the Federal Reserve’s (the Fed’s) more hawkish stance regarding US short term interest rate hikes. As a result, the market is now pricing in a full percentage point hike by July.
China’s Caixin General Composite Purchasing Manager Index (PMI) dipped to 50.1 in January, down from 53 the previous month, as manufacturing output fell again, despite a minor increase in services activity. The growth in China’s services sector slowed to a five-month low, owing to new restrictions in place to combat COVID-19 in some parts of the country.
In response to a slowing economy, Chinese banks extended a record CNY 3.98 trillion in new yuan loans in January, handily exceeding market expectations of CNY 3.69 trillion and more than three times the amount in December. In addition, total social financing, which is a measure of credit and liquidity in the economy, also accelerated to CNY 6.17 trillion, up from CNY 2.37 trillion in December and exceeding consensus of CNY5.4 trillion, as policy support ramps up.
EQUITY MARKETS BOUNCE BACK
The US equity markets had a solid start to the week with the S&P 500 gaining 2.3% and the tech-heavy Nasdaq composite surging 3.4% up to Wednesday’s close. The Nasdaq rose over 2% on Wednesday. However, the higher-than-expected US inflation print and expectations for a more hawkish Fed, led to a sell-off in US markets on Thursday. While both indices are roughly flat this week, they are still in negative territory year-to-date.
Media giant Disney reported a strong set of quarterly earnings results as the company surprised with better-than-expected subscriber growth within their streaming business – in stark contrast to Netflix which reported a slowing subscriber base – and a roaring bounce back from their theme parks business as more guests attended the parks, stayed in the hotels, and booked cruises. The company beat market expectations on earnings and revenue and the share responded by gaining 8% pre-market. Coca-Cola also reported earnings ahead of expectations as consumers drank more away from home, surpassing pre-pandemic levels for the first time. However, similar to their rival PepsiCo, Coca-Cola gave a weaker-than-expected outlook for 2022; citing higher inflation that will weigh on profits in the coming year.
The JSE Top40 Index appreciated by 1.4% this week, driven by a robust performance from the financial and resource sectors which were up 2.2% and 1.7% respectively. Both indices continue their excellent performance year-to-date, as the resource index has gained 9.4% thus far, with financials returning 7%. The best performing stocks of the week were Sanlam up 2.2% and Exxaro up 2.15%. The laggards were the platinum miners. Northam lost 3.8% and Amplats was down 3.7%.
OIL REMAINS BULLISH
West Texas Intermediate (WTI) oil futures closed below $90/barrel on Tuesday and Wednesday as oil consolidated an impressive run year-to-date in 2022. Oil reached a high of around $93 last Friday before weakening into this week. However, bullish momentum was, again, visible in late Thursday’s trading with oil making a run above $91.
Gold increased this week ahead of US inflation data for January, closing at $1 833 per fine ounce on Wednesday, after treading water close to $1 800 for most of last week.
The Bloomberg industrial metal sub index (BCOMIN) rallied to over 191.5 in Thursday’s trading, settling at 189, representing an 8.3% improvement year-to-date. The firm BCOMIN reflects the bullish environment for materials such as copper and iron ore which rallied 6.4% and 7% month-to-date, respectively.
China is again faced with rising coal prices amid a widening of supply and demand after the 2022 Lunar New Year. Coal prices have increased by 8% month-to-date to the current level of $188/tonne despite China achieving a record level of coal production in 2021 of 4.1 billion tonnes, which is 4.7% above 2020 production. Zhejiang province, this week, has approved the construction of a two-gigawatt coal-fired power plant, costing an estimated $1.10 billion.
DOLLAR FIRMS ON CPI PRINT
The US Dollar Index (DXY), which tracks the greenback against a basket of six other currencies, rose after US inflation numbers came in higher than expected, suggesting that the Fed may act more hawkishly in addressing high, and rising, inflation. The DXY was trading at 95.9, up 0.5% for the week.
The Turkish Central bank’s international reserves increased by an astounding $5.8 billion last week to $16.3 billion, having tumbled to a 20-year low last month, due, in part, to the bank selling millions of dollars in market interventions to stem a currency crisis in December. The rise in reserves could also be attributed to the central bank’s $4.7 billion swap accord with the United Arab Emirates (UAE) as well as a requirement of exporters to sell 25% of their forex revenues to the central bank. The country also saw inflation surge to almost 50% in January on the back of the currency losing 44% against the dollar in 2021.
The rand is trading at R15.18/$, R17.30/€ and R20.56/£.