Market and economic wrap - Global markets plunged into the red as fears of Russia-Ukraine conflict, fuel fears of an economic slowdown

Market and economic wrap - Global markets plunged into the red as fears of Russia-Ukraine conflict, fuel fears of an economic slowdown

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Ukraine - The second iron curtain

Russia’s attack on Ukraine continued to dominate global news headlines last week and on Monday morning. This resulted in extreme commodity price swings that are likely to have a profound impact on the global and domestic economy over the short term. 

Russia’s attack started the largest military conflict in Europe since World War II with the situation escalating dramatically over the weekend, when President Putin placed Russia’s nuclear forces on high alert, frustrated by fierce resistance from the Ukrainian military and ever harsher Western sanctions. 

The US, Canada and all European nations agreed to ban Russia from the Society for Worldwide Interbank Financial Telecommunications which will complicate all international transactions, disconnect Russia’s central and commercial banks from the global financial system and indirectly block Russia’s exports and imports. 

It has been a devastating nearly two weeks with the reported death toll reaching the hundreds, although actual figures are expected to be significantly higher. Close to 400 Ukrainians have lost their lives and a further approximately 800 injured according to the United Nations. Furthermore, over 1.5 million refugees from Ukraine have crossed into neighbouring countries. The Russian Defense Ministry has announced that 498 Russian troops have died and 1 597 more have been injured. 

While the situation in Russia and the Ukraine remains fluid, the immediate pressure points for the global economy were quickly revealed, with energy prices being the hardest hit. The U.S. and its allies were said to be engaging in "active discussion" about banning the import of oil and gas from Russia, while ensuring there's enough supply for the rest of the world. Consequently, Brent crude oil prices soared breaching the $130 per barrel over the weekend, putting immense further pressure on inflation globally. 

The additional upward pressure on inflation will squeeze household purchasing power across the globe, especially in Europe where gas forms an important part of the energy mix, and further worsening global price pressures . According to a research note by the Bureau of Economic Research, the Russia-Ukraine war will weigh heavily on near-term world and domestic growth. Just to note that even though Russia contributes only about 2% to global GDP (Ukraine adds very little as its GDP is about half the size of SA), the sheer scale of the expected GDP decline in Russia is anticipated to also subtract from global GDP. For context: some estimates are that Russia’s real GDP could crash by 15% in 2022, multiples of the 2.7% decline in 2020 amid the COVID-19 shock. And because the hit to global growth is likely to be concentrated in Europe, a leading export market for SA, the spill overs should add to the downward pressure on domestic growth. This means we are likely to see surging transport costs and possibly negative confidence effects. 

The slump in global equity prices continued as the Russia’s war against Ukraine intensified. And while the Russian stock market itself makes up a small portion of the global market, European stocks tumbled last week with the French CAC and German Dax shedding over 10% each. 

In the US, the NASDAQ ended the week 2.8% lower, while the Dow Jones Industrial Average and S&P 500 both lost 1.3%. Since the start of the year, global equities have remained on the backfoot. 

Domestically, bond yields rose from the previous Friday's close and yields across the curve rose as investors swerved away from riskier local government bonds. Local stocks rallied throughout the week on the back of strong commodity prices; however, stocks fell sharply on Friday following news of a fire at a Ukrainian nuclear plant. Overall, the local bourse ended the week 0.7% higher as solid gains in basic material stocks outperformed losses in industrial and financial stocks. 

In terms of currency movements, the US dollar gained 3%, and 1.5% against the euro and the British pound from the previous Friday's close, as investors opted for the safety of the dollar amid prospects of tighter monetary policies and heightened political turmoil in Europe. 

Last week the rand lost 1.6% against the dollar as investors rushed towards safer assets after President Putin placed Russia’s nuclear forces on high alert. Over the past four weeks, the local unit is still trading up to 5.2% firmer against the majors. 

Take care and continue to stay safe