Week in Review: Markets Forge Ahead

Major global equity markets rallied strongly over the week, as accelerating vaccinations and the signing of the massive $1,9 trillion American Rescue Plan Act on Thursday by US president Biden provided a strong underpin to investor sentiment.

On Wednesday, the U.S. Labor Department reported its consumer price index (“CPI”) increased 0.4% in the month of February equating to a CPI rate of 1.7% year-on-year. The increase was primarily driven by the recent surge in energy prices. Core (which excludes food and energy) consumer prices only increased by a modest 0.1% in February, slightly below expectations. Core CPI rose 1.3% on a year-on-year basis, retreating from January’s 1.4% gain. Higher global inflation is expected in the near term impacted by strong base effects, the massive fiscal stimulus programs that countries have embarked on and by the recent increase in energy prices.

Equity markets also advanced in Europe as the European Central Bank (“ECB”) pledged to buy more bonds to counter the recent rise in yields. The ECB’s latest estimates forecast EU GDP growth at 4% in 2021, an increase from the 3.9% expansion that the central bank forecast in December. The ECB also revised its inflation outlook to 1.5% from 1% for 2021.

On the pandemic front there continues to be a notable increase in the number of coronavirus infections in a number of European countries with Italy announcing over the weekend that it will impose a nationwide lockdown over the Easter weekend to counter a recent spike in the number of infections.

Global equity markets were generally positive over the week. In the U.S., the Dow Jones (+4.07%), S&P 500 (+2.64%) and Nasdaq (+3.09%) were all up sharply. In Europe, the Euro Stoxx 50 (+4.46%) was also up strongly, as was the FTSE 100 (+1.97%) and the Nikkei 225 Stock Average in Japan gaining 2.96% for the week. The Shanghai Composite Index was the exception posting a weekly loss of 1.4%.

Market Moves of the Week

Eskom, South Africa’s power utility company continued with stage 2 load shedding (rotational power cuts) over the weekend and warned that there was a high probability that load shedding may continue in the week ahead as it continues to implement reliability maintenance.

South African stocks ended the week flat. The resource sector was weaker (-1.14%), while the financial sector was stronger on an improved outlook for the local banking sector. By Friday close, the rand was trading at R14.95 to the U.S. Dollar, strengthening against all of the major developed currencies this week.

Chart of the Week

Oil prices continue to rise on the back of an improved global demand outlook. The recent surge in prices is expected to negatively impact US and global inflation in the year ahead. The chart above shows the strong relationship between energy prices and inflation. The risk of heightened inflation in the months ahead has increased of late and needs to be monitored closely.