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Week in Review: New Variant Shapes Market Sentiment

A new variant of Covid-19, given the name Omicron, was identified in South Africa this week, spooking markets globally. On Friday, the World Health Organisation declared the new variant to be “of concern” and that it will take a few weeks to understand the new variant’s impact. Numerous regions, such as the USA and EU, have restricted travel from South Africa and seven other Southern African countries in an attempt to limit spreading the new variant. Omicron is said to be incredibly mutated and early evidence suggests that it carries a higher risk of reinfection than other variants.

On Monday, U.S. President Joe Biden renominated Jerome Powell to a second term as Federal Reserve chair and elected Fed Governor Lael Brainard as vice chairman. Biden commended Powell for “decisive” leadership during the Covid crisis after making the move. In other Fed related news, the minutes of the latest Federal Open Market Committee were released on Wednesday. They showed that some policymakers are backing a faster tapering of asset purchases amid stickier, more persistent inflation. In other economic related news, the U.S. weekly jobs claims dropped for the first time, to a 52-year low of 199 000 from 270 000 last week.

In an attempt to hinder the recent surge in oil prices, the U.S. along with China, India, South Korea, Japan and Britain are releasing barrels of oil from their strategic petroleum reserves. Joe Biden stated that “It will take time, but before long you should see the price of gas drop where you fill up your tank, and in the longer-term we will reduce our reliance on oil as we shift to clean energy.” Cooling the price of oil would also better inflation figures going forward, as it forms a key part of headline consumer price inflation. The Organization of the Petroleum Exporting Countries and Russia (OPEC+) has been reluctant to increase their output even though there is a clear lack of supply around the world.

During the week, large-scale protests broke out in the Netherlands, Belgium, Austria, and Italy after they imposed stricter controls due to a spike in Covid-19 infections. However, apart from the Netherlands and Austria, the majority of countries stopped short of implementing lockdowns, and some made booster injections that enhance vaccine effectiveness available to all adults.

The Turkish Lira fell to record lows this week, nosediving 15% on Tuesday. The drop came after Turkish President Tayyip Erdogan defended his unorthodox policy of cutting interest rates to battle inflation. In other emerging market news, China’s central bank signalled possible monetary policy easing measures to help the economy’s recovery as growth deteriorates. The economy continued to slow in November with car and homes sales declining as the housing market crisis continued. China’s shipping port policies, due to their Covid Zero stance, are also slowing recovery.

Major global indexes ended the week in the red as the market mood changed dramatically due to fears over the new variant. Travel and energy stocks were hit the hardest, while pandemic-favourite stocks such as Zoom and Pfizer jumped on the news. The S&P 500 (-2.20%), the Dow (-1.97%) and the Nasdaq (-0.20%) all suffered losses. Stocks in Europe sold off sharply, with the Euro Stoxx 50 declining 6.13% while the FTSE 100 dipped -2.49%. Asian indexes were mixed, with the Nikkei 225 down 3.34% and Shanghai Composite Index up 0.10%. Brent crude slumped 7.09% over fears of new Covid-19 restrictions, while Gold fell by 3.01%.

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Market Moves of the Week

South Africa’s producer price index (PPI) jumped to a five and a half year high of 8.1% in October, up from 7.8% in September. The main contributor being the high price of fuel, with petrol prices rising by 26.5% and diesel by over 28% in the year to October.

The South African Business Confidence index stayed flat in the most recent fourth-quarter print, after suffering a sharp decline into negative territory in the third quarter. Concerns over the ongoing electricity crisis and recurrent power cuts, rising inflationary pressures and the drawn out metalworkers’ strike during October all weighed on sentiment. The static index print for Q4 doesn’t bode well for South Africa’s economic outlook, as investments, hiring and other decisions are often linked to the confidence the business sector has on the economy.

On the political front, the ANC was dealt a blow this week after suffering its worst electoral showing, as the party lost control of most of the country’s main urban centers. The DA’s mayoral candidates were elected in Johannesburg, Ekurthuleni and Tshwane, after enlisting the support of smaller parties (EFF, ActionSA and others) to shut out the ANC. A DA-IFP coalition is likely to cause more pain for the ANC next week, as a new mayor is set to be elected for the eThekwini metro.

The South African market sold off Friday (JSE All-Share -2.50%) as news of the new Covid-19 variant spread globally. The re-opening economy trade felt the most pressure, as banks, travel and retail stocks erased weeks of gains. The ZAR continued to weaken this week, ending at R/$ 16.27.

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Chart of the Week

This chart shows different coronavirus variants over time in part of South Africa. An arrow, points out the blue spike representing, Omicron, which became dominant within 2 weeks over the Delta variant (in red). As of Friday, the variant had been detected in South Africa, Botswana, and Hong Kong, its origin is unclear. Source: Business Insider

Chart of the week

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