Week in Review: Geopolitics, Oil and Inflation Dominate Sentiment

The situation in Ukraine continues to evolve, with the globe now focusing on Russia-Ukraine peace talks. Delegates from the two nations met multiple times this week in Istanbul, Turkey for face-to-face meetings. Russia claimed it would reduce attacks and its military activity near Kyiv and the northern city of Chernihiv, while Ukrainian officials have advocated for a ceasefire agreement - the negotiations are still ongoing. Russia also said this week that the first phase of its “special military operation” was complete and that it would now focus on Ukraine’s eastern Donbas region. This move surprised analysts and may suggest that Russia is looking to scale back its invasion.

The Biden administration announced on Thursday that oil reserves from the nation’s Strategic Petroleum Reserve would be released to combat high gas prices and inflationary pressures. The United States will release a million barrels of oil a day for six months, helping them achieve independence from foreign energy suppliers.

In U.S. economic news, the Federal Reserve’s favourite inflation indicator, the personal consumption expenditures price index, jumped 6.4% y/y in February, the fastest pace since January 1982. On another note, nonfarm payrolls in the U.S. expanded by 431 000 for the month of March, below expectations of 490 000, while the unemployment rate came in at 3.6% vs 3.7% expected.

U.S. Treasury yields inverted this week, with the spread between the U.S. 2-year Treasury note and the 10-year rate inverting for the first time since 2019. This spread is often monitored by investors as an inversion can sometimes signal an oncoming recession. The Federal Reserve however monitors the spread between the 10-year and 3-month Treasury rates, using it as their favoured leading indicator.

Estimates showed that Euro-area headline inflation rose to 7.5% in March, compared with 5.9% in February. This spike in inflation calls into question the 5.1% inflation prediction that the European Central Bank (ECB) had projected for the year. Money markets are now pricing in more than 50 basis points of hikes from the European Central Bank in 2022.

China’s zero-tolerance policy towards Covid-19 is deteriorating its business conditions and is directly impacting the operations of the world’s largest container port in Shanghai; reducing its efficiency. China’s biggest city, Shanghai, entered into a two-stage lockdown on Monday, the outcomes of which could significantly impact the Chinese economy. Chinese Covid impacted areas cover c. 30% of China’s GDP; and have been costing roughly $46Bn a month, or 3.1% of Chinese GDP (according to Goldman Sachs estimates).

Weak manufacturing data was released from China this week, with March’s producer manufacturing index coming in at 48.8, down from 51.2 the previous month. It is estimated that the decline understates the degree of business slowdown and deterioration in China, as the survey was closed on March 25 – three days prior to Shanghai locking down.

Major indices’ movements were fairly muted this week as global investors processed geopolitical headlines and fresh inflation figures. The S&P 500 Index managed a 0.06% gain, closing out its best month since December but its worst quarter since early 2020. The Nasdaq had a slight bounce, up 0.65% while the Dow Jones ended the week -0.12% lower. Europe (Euro Stoxx 50) maintained momentum, rising 1.32% while the FTSE 100 climbed 0.73%. Asian indexes were mixed, with the Nikkei 225 down -1.72% and Shanghai Composite up 2.19%. Brent crude fell -12.49% this week following Biden’s announcement to release oil reserves, while Gold dropped by -1.73%.

Market Moves of the Week

Negative economic data prints came out of South Africa this week, with Q421 unemployment and Feb PPI producing gloomy figures. SA unemployment, which has been severely impacted by Covid-19, rose in the last quarter of last year to 35.3% (2.8% y/y), the highest rate since the start of the quarterly labour force survey in 2008. A look through into the numbers shows that the labour force grew by 2.5% q/q while only 1.8% q/q were employed. A priority area of government, youth category unemployment (15-24 years), remained lofty at 66.5% in Q421.

South Africa’s producer prices increased more than economists expected in February. PPI for final manufactured goods rose to 10.5% y/y (estimate +10.2%) versus +10.1% in January. The main contributors were within the coke, petroleum, chemical, rubber and plastic products grouping. The marked fuel price hike implemented in March will see further upwards pressure within this category of the PPI basket.

In an attempt to combat rising fuel costs for South Africans and support the phasing in of fuel price increases, the government announced that it will reduce its fuel price levy by R1.50/l for two months in April and May. Around R6 billion of the state's strategic oil reserves will be sold to offset the tax hit.

Moody’s, the international credit rating agency, upgraded its outlook on South Africa from “negative” to “stable” on Friday. “South Africa’s fiscal position has markedly recovered from the pandemic thanks to government’s fiscal consolidation measures and positive external developments,” Moody’s said. The agency, however, kept South Africa’s government bonds “junk” rated (two levels below investment grade).

The JSE All-Share Index managed to outperform its developed market peers this week, ending the week up 2.13%. Financials had the hardest run, up 3.62% while resources remained steady, rising 0.31%. The Rand depreciated over the week to end at 14.61 USD/ZAR.

Weekly Moves - 3 April

Chart of the Week

Eurozone inflation surged 7.5% y.y, up from 5.9% in February, overshooting estimates. Energy had the highest annual rate in March as Russia’s invasion of Ukraine provided a fresh driver for already-soaring energy costs. The spike in inflation leaves the ECB with a difficult policy dilemma. Source: Bloomberg

Chart of the week - 3 April 2022

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