After about a 10 percent move higher in global equities since mid-March lows, equity markets pulled back slightly this week, while longer-term bond yields rose to three-year highs. Central to this was the release of the Federal Reserve and ECB’s March meeting minutes, which laid out plans for speedier policy tightening and further imposed sanctions on Russia.
Federal Reserve officials laid out a long-awaited plan to shrink their balance sheet by more than $1 trillion a year while raising interest rates “expeditiously” to counter the hottest inflation in four decades. The Fed signalled it will reduce its massive bond holdings at a maximum pace of $95 billion a month, this is much faster than the peak rate of $50 billion a month the last time the Fed trimmed its balance sheet, from 2017 to 2019. Beyond the balance sheet, the minutes showed that “many” officials would have preferred to raise rates by a half percentage point following the March meeting.
Minutes from the ECB’s March meeting were also more hawkish than expected, with many policymakers indicating that conditions for lifting interest rates had either been met or would soon be met. Some argued for winding down the central bank’s asset purchase program by September.
Following on from the U.S.’s ban on investment in Russia, the European Union (EU) also imposed more sanctions this week, after reports that Russian forces had committed war crimes in Ukraine. European proposed sanctions include the banning of Russian coal imports and new machinery exports to Russia. After sparring between EU members, the phase-in period for the embargo was extended to four months. Eurozone investor confidence decreased to -18.00 in April; the lowest reading in nearly two years, compared to March’s reading of -7.00.
Shanghai has been under a citywide, two-stage lockdown that began on March 28 to stop the virus’s spread. With 23 Chinese cities currently under total or partial lockdown, an estimated 193 million people are affected in areas that account for 13.5% of China’s economy. China has signalled it will loosen monetary policy as authorities seek to combat an escalating Covid outbreak, slumping property market and spiking commodity prices. Officials will use monetary policy tools at an “appropriate time” and consider other measures to boost consumption, according to the readout from a meeting of the State Council. The People’s Bank of China is expected to cut the bank’s reserve requirement ratio in the second quarter.
China’s market regulators also proposed revising confidentiality rules involving offshore listings. The move signals a possible breakthrough in the disagreement that has raised the risk of the delisting of approximately 270 U.S.-listed Chinese companies as early as 2024. However, tensions between the U.S. and China remain high, with the U.S. regulator dismissing the suggestion of an immediate deal that would halt de-listings, stating that only total compliance with the U.S. audit inspections will allow Chinese companies to keep trading on U.S. markets. The U.S. deputy secretary of state has also warned China that it might face sanctions if it provided material support to Moscow. At the same time, Biden’s administration has equally warned India against further cosying up to Russia.
The IMF downgraded Japan’s economic growth outlook for 2022 from 3.3% to 2.4%, due to higher commodity prices and elevated uncertainty relating to the Ukraine conflict impacting domestic demand. Japanese household spending dropped in February for a second straight month.
Russia slipped closer to a technical default after foreign banks declined to process about $650 million of dollar payments on its bonds, forcing it to offer rubles instead. While Russia’s finance ministry said it “fulfilled its obligations,” neither of the securities involved allowed payment in rubles. This comes after the U.S. Treasury said it was halting dollar debt payments from the nation’s accounts at U.S. banks. Russia has so far sidestepped its first external default in a century, but the Treasury move this week to halt dollar debt payments has reignited investor concerns.
Global equities were negative. In the U.S., the Dow Jones (-0.28%), S&P 500 (-1.27%) and Nasdaq (-3.86%) were all in negative territory. Similarly, the Euro Stoxx 50 (-1.54%), Nikkei 225 (-2.46%), and Shanghai Composite Index (-0.94%) were all softer. The exception was the FTSE 100 (+1.75%) ending the week stronger. The price of brent crude oil decreased by -1.92% this week to USD 102.35 a barrel but remains up +31.59% year-to-date.
Market Moves of the Week
The big news out of South Africa was the announcement of the end to the state of disaster declared more than two years ago to manage the coronavirus pandemic. Transitional measures, including the wearing of face masks at indoor public spaces and limits on gatherings, will remain in place until new regulations are promulgated next month.
On Wednesday, Moody's maintained its non-investment grade rating of Eskom at Caa1 with a negative outlook and warned that the power utility must urgently get to grips with its debt burden and operational problems if it hoped for an upgrade. This comes after Moody’s upgraded its outlook on South Africa from "negative" to "stable".
The JSE All-Share Index ended the week down -1.49%, led lower by industrial (-2.76%) and financial (-3.17%) shares, whilst resource shares (+0.91%) continue to benefit from higher commodity prices. By Friday close, the rand was trading at R14.66 to the U.S. Dollar.
Chart of the Week
Following on from the EU’s ban of Russian coal imports this week, energy security remains front of mind. According to BloombergNEF, fully replacing Russian oil will be difficult, if not impossible, in the event of widespread sanctions. Increased production by Saudi Arabia and the UAE, procuring more oil from Iran, and International Energy Agency (IEA) demand curbs will only offset 92% of Russian barrels consumed globally.