Concerns about the outlook for the global economy continued to weigh on financial markets amid growing fears of aggressive central bank policy and heightened geopolitical tensions sent stocks in the U.S. to their third consecutive weekly decline. The benchmark S&P 500 index ended the week 2.91% lower, while the tech heavy Nasdaq was 2.69% lower on the week.
Friday’s U.S. core (less food and energy) personal consumption expenditures price index release added to investor concerns. The inflation measure, that the US Federal Reserve focuses on when setting monetary policy, rose 4.9% from a year ago in August from an upwardly revised 4.7% in July. The read was stronger than expected despite the Federal Reserve’s recent rate hikes which are yet to work their way in bringing down prices.
Last week, Japan’s Ministry of Finance intervened directly to avert yen depreciation against the U.S. dollar, this Wednesday brought the Bank of England’s (“BoE”) intervention in the bond market by pledging unlimited purchases of long-dated bonds “to restore orderly market conditions”. The BoE also delayed the start of its plan to start actively selling its existing holdings of bonds.
The rout in bond markets stems from the U.K. government’s determination to slash taxes and regulation through the biggest package of unfunded tax cuts in half a century. The BoE intervention followed criticism on Tuesday from the International Monetary Fund, which argued that Britain’s budget could increase inequality and worsen inflation. UK rates and the pound stabilized after the intervention.
Shares in Europe were also lower amid growing fears of recession and a higher eurozone inflation print of 10% YoY in September from 9.10% YoY in August. In local currency terms, the pan-European STOXX Europe 50 Index ended the week 0.91% lower while the UK’s FTSE 100 Index lost 1.78%.
Markets in Asia were also under pressure with the Nikkei average falling 4.5% on the week and China’s broad, capitalization-weighted Shanghai Composite Index falling 2.1%, currency weakness and signs of a flagging economy fuelled investor concerns about the region’s economic outlook.
It is suspected that two massive underwater blasts caused ruptures in the Nord Stream 1 and 2 pipelines (two Russian pipelines) this week. Experts say the scale of the damage and the fact that the leaks are far from each other on two different pipelines indicate that the act was intentional and well-orchestrated. The ruptures have generated plenty of theories but few clear answers about who or what caused the damage with both Russia and the European Union suggesting the ruptures were caused by saboteurs. On Friday, Russian President Putin delivered a formal speech announcing that Russia is to annex nearly a fifth of Ukraine following referendums, which have universally been dismissed as an illegal land-grab by the Ukraine and Western countries. On the battlefield, Russian forces continue to suffer losses with the latest being a forced withdrawal from the strategic east Ukraine town of Lyman where Kyiv’s forces were threatening to encircle them.
Market Moves of the Week
Employment in South Africa’s (SA) formal sector fell sharply in the second quarter, as per the recent release of Stats SA quarterly employment survey earlier in the week, largely as a result of falls in the community services, manufacturing and trade sectors.
SA producer price inflation slowed to 16.6% in August from a 14-year-high rate of increase of 18% in July, Statistics South Africa said on Thursday. PPI’s August read follows that for CPI, which slowed to 7.6% in August from a 13-year-high rate of increase of 7.8% in July. The main factor driving both indicators has been the falling global price of oil.
Public Enterprises Minister Pravin Gordhan, announced the appointment of a new Eskom board, replacing its chair and appointing 13 non-executive directors. The new board combines a mix of legal, engineering and financial skills, of which Mpho Makwana (an independent nonexecutive chair of ArcelorMittal SA and chair of Nedbank) will be chair. Friday marked the 25th straight day of load-shedding (rotational power cuts) as electricity outages reached record levels this year but there was some positive news from Eskom indicating that some larger units were expected to come back online in the week ahead, reducing the need for rotational power cuts completely by next weekend.
The JSE closed firmer on Friday, ending the week up 0.5%, buoyed by strong gains in commodity counters. In currency markets the rand weakened against the dollar on Friday, after data showed the country’s trade surplus narrowed significantly in August (recording a trade surplus of 7.18 billion rand ($397.34 million) in August, down from a 24.81 billion rand surplus in July). By Friday close, the rand was trading at R18.15 to the U.S. Dollar, weakening by 1.17% over the week.
Chart of the Week
The US dollar is the strongest it’s been for two decades, compared with other major currencies. The dollar index (DXY) – which measures the US dollar against an average of six other major currencies, including the euro, pound and yen – has risen 15% in 2022. By this measure, the dollar is at a 20-year high. This strength has been supported by the relatively strong performance of the U.S. economy, tightening monetary policy by the Federal Reserve, and safe-haven buying (in times of economic and political turmoil, investors historically have moved to the U.S. dollar for safety and liquidity).