GLOBAL inflation as well as the geopolitical situation in Ukraine continue to dominate financial markets and economic policy makers currently.
Expectations for interest rate hikes across the Developed Markets (DM) and the Emerging Markets (EM) become more of a reality as global oil and gas prices continue to increase sharply. This is fuelling global stagflation fears, and big downward corrections in share and bond prices are expected.
In the US it is widely accepted that the Federal Reserve will hike its bank rate by at least 0.25 percent in March. The ongoing war in the Ukraine put pressure on most commodities and the prices for gold, platinum, wheat, coal, maize, corn and sunflower are soaring to record highs, pushing costs of food and resources higher that eventually will accelerate world inflation.
The price for Brent Sea Oil increased by more than $40 (R615) per barrel over the past month and traded as high as $116 per barrel on March 3.
Given the sharp increase in the oil price from February 25, and the rand exchange rate that remains under pressure, the under recovery within the first week after the price setting of an increase R146 per litre that kicked in last Wednesday, for diesel is already R2.15/litre and for petrol 95 is R1.82/litre. It is expected that the price for petrol may shoot up to R25/litre at the beginning of April.
In reaction to the Russian taking of cities and electricity facilities in Ukraine, share prices across the globe decreased substantially on Friday.
Most bourses lost more than 2.5 percent alone on Friday, with the FTSE100 down on the day with 2.7 percent, while the DAX in Germany lost 4 percent and the CAC in France was down by 4.3 percent. In the US, on Wall Street, on Friday the Dow Jones lost 0.53 percent, the S&P 500 was down 0.8 percent and the Nasdaq traded lower by 1.7percent.
Better-than-expected non-farm payrolls contributed to some recovery in US equities and helped Wall Street to end almost flat for the week, despite the Ukrainian turmoil.
South African resources, however, could stand their ground during the first week of the invasion. Despite the gloom and doom on global financial markets last week, South African equity and foreign exchange markets, with the exception of industrial shares, could absorb the shocks.
Even though share indices on Friday had their biggest one-day fall since the beginning of the lockdown during the Covid-19 pandemic in March 2020, the All Share index and the Resources 10 indices still ended the week in positive territory, due to a strong surge during the first four days of last week.
The All Share index on Friday alone lost 3.43 percent, but still gained 0.3 percent over the week. The Resources 10 index gained more than 9 percent last week, although it contracted 6.6 percent on Friday. The Industrial 25 index was down by 7.7 percent last week and is now 16.7 percent down since the beginning of the year.
Bond yields remain under pressure given the stronger rand and investors preferring haven assets like gold and the dollar.
The rand exchange rate lost 23 cents against the dollar last week and was trading late on Friday evening at R15.41. This, however, is still 54c stronger than the R15.95 opening level on January 2.
Against the pound the rand traded sideways and remained around R20.40 to R20.52 during last week and against the euro it appreciated last week to R16.85. This also is much stronger as the R21.59 (pound) and R18.15 (euro) levels at the beginning of the year.
In the US job data that were released on Friday, non-farm payrolls rose by 678 000 in February as the unemployment rate edged down to 3.8 percent, the same level as in pre-Covid February 2020. This rate increases the chances that the Federal Reserve will increase its bank rate in March.
This coming week domestically the release of South Africa’s gross domestic product (GDP) growth rate for quarter four (Q4) and for the whole 2022 on Tuesday will be of importance. It is expected that the economy grew by 2.9 percent, year-on year during Q4, but contracted by -1.5 percent quarter-on-quarter. For 2022 the GDP growth rate is expected at 4.9 percent.
Statistics SA will also release the latest mining and manufacturing production data for January.
On global markets, the release of the US inflation rate for February on Thursday will attract the most attention. It is expected that the US CPI (consumer price index) increased even further to 7.9 percent, up from 7.5 percent in January and the highest rate in more than 40 years.
The EU will also release its GDP growth rate for quarter four.
Dr Chris Harmse is the economist at CH Economics and lecturer at the School of Commerce at Stadio Multiversity.
BUSINESS REPORT ONLINE