The world seems to be jumping from one catastrophe to next, first with COVID-19, and now with the Ukraine-Russia war. With these calamities taking centre stage, other events, risks and considerations have been overshadowed and pushed onto the backburner. These are, however, still important considerations in the geopolitical, socio-economic and financial realm.
COVID-19: It may not be the key focus of markets presently, but the continued battle against the virus and subsequent economic impacts and recoveries remain relevant as investors navigate troubled waters. As countries such as Australia finally welcome vaccinated travellers again and the globe as whole sees a16% decline in new reported cases, some regions are struggling to get a handle on continuous outbreaks. An 32% increase in weekly cases was reported across the Western Pacific region. Hong Kong requested assistance from Mainland China, as COVID-19 cases overwhelmed hospitals over the past week. Meanwhile, containment strategies continue to weigh heavily on the Chinese economy, with the world’s second largest economy seeing a decline in its services sector, yet again.
THE UNITED STATES (US) FEDERAL RESERVE (FED) ON INTEREST RATES: While many argued that the war in the Ukraine might deter the Fed from hiking interest rates, Fed Chair, Jerome Powell, made it clear on Wednesday that the Bank will proceed with its plan to hike rates in March, albeit in a more cautious manner. We expect to see a 25basis point (0.25%) hike, as opposed to the original 50, this month. The Fed chief, however, said he was ready, if needed, to use larger or more frequent rate moves if inflation does not slow, and may over time need to push rates to more restrictive levels of above 2.5%. This would slow economic growth rather than simply stimulating it lessrobustly. Inflation is currently triple the Fed’s 2% target and has become a prime political concern for the Biden administration and members of Congress. Powell also proceeded to note that the price pressures are “not as transitory as we had hoped…other mainstream economists and central banks around the world made the same mistake. That doesn’t excuse it, but we thought these things would be resolved long ago.” The Ukraine-Russian war is expected to further exacerbate inflation concerns as commodity prices skyrocket.
CHINA-TAIWAN TENSION: There is some speculation that the Ukraine-Russia war has dealt a blow to China’s ambition to annex Taiwan, but the matter is far from settled. Tensions continue to simmer beneath the surface. On Wednesday, China denounced a visit by a US delegation to Taiwan as the island’s president, Tsai Ing-wen, vowed to work more closely with allies in response to what she called China’s growing military threat. The Chinese Foreign ministry spokesperson, Wang Wenbin, was quoted as stating, “The attempt by the US to show support to Taiwan will be in vain, no matter who the US sends…the Chinese people are firmly determined and resolved to defend national sovereignty and territorial integrity.” The situation is fragile at best and will certainly affect the markets as it unfolds.
DATA IN A NUTSHELL
European annual producer inflation hit a record high of 30.6% in January, compared to26.3% in December and was well above market forecasts of 27%. Energy prices soared by85.6% and were once again the biggest contributor to inflation. Meanwhile, the region’s unemployment rate fell to a record low of 6.8% in January, down from 7% in December and below market forecasts of 6.9%. The recovery in the labour market is gaining momentum as countries start to ease Omicron restrictions.
US initial jobless claims decreased by 18,000 to 215,000 in the week ended 26 February. It was the lowest number since the start of the year. On a non-seasonally adjusted basis, initial claims fell by 21,285 from the previous week, to 194,693. Taking a look at the United Kingdom (UK), IHS MARKIT/CIPS UK Manufacturing Purchasing Managers Index (PMI)crept up to a three-month high of 58 in February, up from its four-month low of 57.3 in January. Domestic demand, fewer raw material shortages, and easing global supply chain issues allowed production to rise at its highest pace in seven months.
EUROPEAN SHARES DIP, WHILEMOSCOW EXCHANGE SUSPENDS TRADE
Major bourses in Europe fell into negative territory on Thursday, with the DAX dropping 0.7%, underperforming its peers, as traders follow the ongoing crisis in Ukraine. Weakness was broad-based, however soaring commodity prices support the mining and energy sectors. On the earnings front, Germany’s national airline, Lufthansa, said it could not provide a detailed outlook for 2022 due to the war in Ukraine and the pandemic, while Telecom Italia swung to an €8.7 billion (£7.2 billion)loss in the fourth quarter of 2021 on impairments, as it prepares for a spinoff of its landline network. British insurer, Aviva, missed earnings expectations.
The Bank of Russia kept stock trading at the Moscow Exchange suspended on Thursday but noted that a limited range of operations will be available and that it would make a statement about future operations on Friday. Authorities suspended trading for a fourth consecutive day to protect Russian assets from sustaining sharp losses amid a series of harsh sanctions imposed on Russia for its invasion of Ukraine.
US stock futures were little changed early on Thursday after Wall Street rallied overnight, as Fed Chair, Jerome Powell, affirmed that the Bank will take a measured approach to hiking interest rates. Futures tied to the three major indexes fluctuated between small gains and losses. On Wednesday, the Dow Jones added 1.79%, the S&P500 gained 1.86% and the NASDAQ was up by 1.62%.
The UK-based FTSE 100 reversed earlier gains to trade slightly below where it started on Thursday, after rebounding by 1.4% in the previous session, as losses in banks, and travel and leisure stocks offset gains in basic resources, amid the ongoing war in Ukraine. On the earnings front, London Stock Exchange Group increased dividends, stating the 2022 outlook looked upbeat. They said the integration of Refinitiv was on track.
Brent crude futures briefly topped $119 per barrel on Thursday, their highest level since May 2012, on fears of further supply disruptions from sanctions imposed on Russia. The US took aim on Wednesday at Russia’s oil refining sector with new export curbs and it targeted Belarus with extensive new export restrictions. The US has, however, stopped short of targeting Russia’s oil and gas exports amid concerns over energy prices. The expanded Organisation for Petroleum Exporting Countries, the OPEC+ alliance, that includes Russia, also stuck to a planned output increase of 400,000 barrels a day in April, despite the market turmoil brought on by the war. Moreover, US crude inventories continued to decline, with stocks at Oklahoma’s Cushing Crude Hub dropping to their lowest levels since 2018.
Gold crept above $1,930 an ounce on Thursday, after falling almost 1% from a near 13-month high in the previous session. Investors are balancing geopolitical risks and adjusting their expectations as to how fast central banks will raise interest rates. While the conflict between Russia and Ukraine has added to inflationary risks and growth concerns, therefore supporting gold, higher interest rates raise the opportunity cost of holding onto the non-yielding metal.
Newcastle Coal Futures broke another record high at $400 per tonne and are now up more than 100% since the beginning of 2022. Mounting sanctions on Russia have led to an international energy crunch and exacerbated concerns over the commodity’s supply. Germany is poised to create coal reserves for electricity power plant operators, while Italy announced it could reopen some closed coal plants. Asian customers have also been scrambling to find alternative supplies to replace Russian coal. Investors had already been bullish on coal since early 2022, amid supply disruptions in top exporting countries such as Indonesia and Australia.
RUSSIAN RUBLE AT RECORD LOW
The Russian ruble (₽) fell to a record-low of ₽118/$ on Thursday, as Western sanctions continue to pressure Russian assets. Rating agencies, Fitch and Moody’s, downgraded Russian sovereign bonds by six notches to “junk” status. Over the week, Western allies largely limited Russian entities’ ability to transact internationally, after agreeing to remove key Russian banks from the SWIFT Interbank system and freezing the assets of the country’s central bank. The fall came despite strong efforts by the Central Bank of Russia to stabilise the currency, raising its key policy rate to 20% from 9.5%, banning foreigners from selling Russian securities, and mandating Russian brokers to charge 30%in commission to individuals for the purchase of foreign currencies. Meanwhile, the Russian banking system’s liquidity shortage widened to ₽6.9 trillion, as citizens continue to rush to withdraw cash.
The euro continues to feel the pinch, weakening further to below $1.11, its lowest level since May 2020. The outlook for the eurozone’s economy deteriorated during the week and Western sanctions raised uncertainty around the European Central Bank’s policy path. While growth will likely take a hit from the war, hopes that inflation would start to peak in the early part of 2022 faded as the energy crisis threatens increased fuel costs.
The pound depreciated below $1.34, not far from the ten-week low of $1.327 hit on 2March 2022, as investors sought shelter in safe-haven currencies amid escalating conflict in Ukraine. The dollar index stabilised around 97.5 on Thursday, after hitting a 20-monthhigh of 97.83 in the previous session, after Fed chair, Jerome Powell, affirmed that the central bank will take a measured approach to hiking interest rates. Meanwhile, investors were kept on edge as supply issues were exacerbated by the events of the last week, which drove oil prices to multi-year highs, adding to inflationary risks and growth concerns.
The pound started the day trading at 1.3312/$ and 1.21/€.
Written by Citadel Global Director, Bianca Botes.
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