Market and economic wrap - Domestic assets buck the trend as global risk sentiment sours
It was a tough week for global stock markets as ongoing concerns about high inflation, disappointing company earnings reports and the intensifying of geopolitical tensions amid the Russia/Ukraine standoff weighed on investor sentiment. Over the weekend, the U.S. Secretary of State Antony Blinken reiterated his warning against a Russian invasion of Ukraine, saying that any aggressive Russian interference would be met with a “severe” response.
It was brutal week on Wall street, with the tech-heavy NASDAQ shedding a massive 7.6% amid disappointing earnings results by certain technology giants such as Netflix. The Dow Jones and S&P 500 also lost a substantial 5.7% and 4.6%, respectively. European markets followed suit, with the German Dax and French CAC down 1.8% and 1% respectively from the previous week's close.
The risk-off sentiment provided some support to traditional safe-haven assets, this saw the US dollar recover some of the ground lost against the euro so far this year. The gold price traded somewhat higher, while the 10-year US Treasury yield ended the week slightly lower after increasing notably since the start of the year.
Concerns about a disruption to oil supplies from Russia in the event of war with the Ukraine fueled a further rise in global oil prices. Brent crude oil traded above $88/bb, reaching the highest level since 2014. Locally the JSE all-share index fell in line with global sentiment and ended the week almost 0.5% lower. However, over the past four weeks, the ALSI is trading 4.6% higher, supported by solid performances across the board.
The bond market had a good week, with the yield on the 10-year government bond declining by more than 10 basis points. According to the Bureau of Economic Research, one of reasons for the move lower was as a result of some of the largest domestic fund managers who argued that, notwithstanding the expectation for higher global interest rates, local bond valuations are attractive. The argument is that local yields, amongst the steepest in the emerging market space, already more than sufficiently reflect domestic idiosyncratic risks. Additionally, in real terms, domestic bond yields offer significantly better returns than developed country bond.
Despite a firmer dollar, the rand continued to surprise by strengthening further against major currencies and appreciated by 1.6% week-on week against the US dollar. With that’s said, the rand remains vulnerable to changes in global risk appetites, which are likely to be erratic given the shifts in global monetary policies. There are many uncertainties surrounding the inflation outlook and the SARB is likely to increase the repo rate further. In addition, developments on the local electricity front will be an important factor influencing domestic headline CPI in 2022. Energy regulator Nersa conducted public hearings last week on Eskom’s proposal for a more than 20% tariff increase in the 2022/23 financial year. Several business groups, including the Minerals Council, warned against the negative impact on specific industries and the overall economy if the request for such a steep increase is granted. Nersa is scheduled to announce its tariff decision in late February. This week's focus will be on the SARB’s Monetary Policy Committee’s first meeting for the year.
Apart from the local central bank in the spotlight this week, one of the big global events on the calendar is US Federal Reserve Bank, the Federal Open Market Committee, which sets interest rates, meets with expectations that it won’t act at this meeting but will tee up the first of multiple rate hikes starting in March. At his post-meeting news conference, Fed Chair, Jerome Powell could also signal when the Fed will start to unwind its mammoth balance sheet.
Until next time,
Take care and continue to stay safe
From the Multi-management team