Week in Review: Oil Prices Surge as War Escalates

On Wednesday, the United Nations General Assembly overwhelmingly voted to reprimand Russia for invading Ukraine and demanded that Moscow stop fighting and withdraw its military forces. The resolution was supported by 141 of the assembly's 193 members, passed in a rare emergency session called by the U.N. Security Council while Ukrainian forces battled to defend the Russian invasion.

Russia was joined by Belarus, Eritrea, North Korea and Syria in voting against the resolution. Thirty-five members, including China, abstained. U.S. Ambassador to the United Nations Linda Thomas-Greenfield told the assembly to "Vote yes if you believe UN member states – including your own – have a right to sovereignty and territorial integrity. Vote yes if you believe Russia should be held to account for its actions". Russia's U.N. envoy, Vassily Nebenzia, denied Moscow was targeting civilians and repeated Russia’s assertion its action was a special military operation aimed at ending purported attacks on civilians in the self-declared Moscow-backed republics of Donetsk (DLR) and Luhansk (LPR) in eastern Ukraine.

The Russian invasion is focussed on “demilitarising” and overthrowing Ukraine’s government, whilst forcing the recognition of Crimea as part of the Russian Federation, as well as DPR/LPR within their administrative borders. The military action is aimed at destroying Ukraine’s infrastructure and causing widespread desperation compelling the Ukrainian government to concede to Putin’s terms (ultimately leaving the Ukraine in a powerless state).

On Friday Russia’s reckless assault to capture Europe’s largest nuclear plant (Zaporizhzhia in south-eastern Ukraine) triggered global condemnation. The attack set fire to a building in the complex, heightening fears around Russian tactics. Fortunately, the fire did not spread, and no nuclear reactors were damaged according to the International Atomic Energy Agency. The plant continues to be run by Ukrainian staff but under Russian control.

It is estimated that more than 1,5 million refugees have fled Ukraine, with Ukraine’s urban centres facing heavy bombing and Ukrainian president Zelensky’s office warning of a humanitarian catastrophe. A planned mass evacuation of civilians from Mariupol and Volnovakha turned into chaos on Saturday, as Russian forces continued to shell the city of Mariupol despite a brokered temporary ceasefire a few hours earlier.

President Zelensky has appealed to NATO to set up a no-fly zone over Ukraine, but NATO refused, warning that to do so could provoke widespread war in Europe with nuclear-armed Russia.

The Russian stock market was closed during week as the Rouble plunged on international currency markets despite the Russian Central Bank’s move to raise the policy rate from 9.5% to 20%.

The west has severed trading relationships with Vladimir Putin’s Russia on a scale thought unimaginable with seven Russian banks, including VTB, the second-largest, excluded from Belgian-based Swift, the bank messaging system that underpins global trade. Sanctions include the freezing of Russia’s central bank access to its foreign currency reserves ($630bn) held in dollars, euros and sterling. Index providers MSCI and FTSE Russell announced that it would remove Russian securities from its indices while at least 30 countries have banned Russian planes from their airspace. The UK government moved swiftly to blacklist a handful of Russian business people with links to Putin, while U.S. President Joe Biden followed announcing new penalties targeting Russian oligarchs with close ties to Putin.

A growing number of global companies have responded to the Russian invasion through sanctions, disinvestments and a suspension of operations with the likes of Visa, Mastercard, Apple, Microsoft and Samsung pausing sales in Russia (to name a few), Nike preventing Russian customers from buying online, carmaker Ford suspending its joint venture in Russia, Adidas (Europe’s largest sportswear manufacturer) suspending its partnership with the Russian Football Union, while The Walt Disney Company, said it was pausing its release of films in Russia.

Russia’s largest foreign investor, BP, led the way with its announcement that it would exit its 20% stake in state controlled Rosneft, a move that could cut its global oil and gas production by a third, while Shell will end its joint ventures with Russian state energy firm Gazprom.

The sports world has also reacted to the invasion with Formula 1 cancelling September’s Russian Grand Prix, the relocation of the UEFA Champions League final which was planned to be held in St. Petersburg to Paris and numerous global sports teams standing in unison against Russia’s war on Ukraine.

Switching to U.S. interest rates Federal Reserve Chair Jerome Powell told Congress this week that the central bank is on track to raise interest rates this month, saying that he was inclined to stick with a quarter-point increase in the federal funds rate in March. But Russia’s invasion of Ukraine means the Fed will “move carefully,” he said.

On Friday the US Bureau of Labor Statistics reported that the US economy added 678,000 jobs last month, far ahead of expectations, as activity continued to rebound. The unemployment rate also edged down to 3.8%, indicating a robust labour market recovery.

Markets remained volatile for the week, with the U.S. benchmark S&P 500 off 1.3%, while the Nasdaq lost 2.8%. Shares in Europe also fell sharply, as investors weighed the possible implications of Russia’s invasion of Ukraine. In local currency terms, the pan-European STOXX Europe 50 Index gave back over 10% of its value, while the UK’s FTSE 100 Index also pulled back 6.7% for the week.

Japan’s stock markets also registered losses for the week, with the Nikkei 225 Index falling 1.85% with Prime Minister Fumio Kishida’s government imposing more sanctions on Russia in coordination with Western nations. In China, the Shanghai Composite Index dipped 0.1% as the War and weaker domestic economic data weighed on investor sentiment.

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Market Moves of the Week

The latest Zondo Commission report was released during the week, which found evidence against Minister of Mineral Resources and Energy Gwede Mantashe, raising serious ethical and legal questions for the ANC and its leaders. The report recommends that the Minister should be investigated further, adding that there was a reasonable prospect this would uncover a corruption case against him.

The JSE All-Share Index retreated the most in six weeks on Friday as stocks fell broadly, with Naspers and Prosus leading the losses on the local bourse. The JSE All-Share managed to end the week positively, gaining 0.71% led higher by the strong performance of the resource sector (+9.71%). By Friday close, the rand was trading weaker on the week at R15.33/$.

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Chart of the Week

Oil prices eased from their highs on Thursday amid reports that Western nations are close to a deal with Iran over its nuclear program but by Friday prices headed for their biggest weekly surge as sanctions continued to disrupt Russian oil supply, the world’s second-biggest exporter. Benchmark Brent Crude rose as high as $119.84 a barrel, its highest since 2012. Russia ships more than 7 million barrels per day (bpd), with about half going to Europe, accounting for 12% of the world’s total crude exports in 2020.

Investor anxiety has been heightened recently by the war in Ukraine and impending rate rises by the Federal Reserve. As such, we advise investors to maintain a calm stance during the crisis, diversify, and maintain exposure to long-term themes. Investors need to look beyond near-term news and gain exposure to industries benefiting from longer-term growth trends.

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