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Markets recoup some losses after bloodbath

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OPINION: Global financial markets started to recover last week after a huge overreaction on the Ukraine war that saw oil prices reached record levels last Monday, writes Chris Harmse.

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GLOBAL financial markets started to recover last week after a huge overreaction on the Ukraine war that saw oil prices reach record levels last Monday.

Brent crude at one stage traded at $136 (R2,406) a barrel, a more than $20 jump over last weekend after the US and the UK placed a ban on oil imports from Russia.

Share markets continued their sharp downward movement at the beginning of last week, as fears for a sharp increase in fuel and food prices throughout the world increased inflation and higher interest rate expectations.

Although there was some recovery last Wednesday and Thursday, markets across the globe ended the week mixed and uncertain.

South African financial markets, however, recovered stronger. The news that the country posted its largest current account surplus on record, (3.7 percent of gross domestic product), higher-than-expected economic growth of 4.9 percent in 2021 and the appointment of Chief Justice Raymond Zondo boosted the rand exchange rate and non-rand hedged shares on the JSE. This coming week all eyes will be on the Federal Reserve’s decision to increase interest rates in the US or not.

In the US, the inflation rate jumped to 7.9 percent in February 2022. This is the highest increase in the US CPI (consumer price index) since January of 1982. Food prices accelerated by 7.9 percent on last February, the largest since July of 1981.

These two fears, namely inflation and the effects of the Ukraine-Russia war had led to a strong sell-off of US and European stock during the first part of last week. The Dow Jones lost 2.8 percent during Monday and Tuesday alone, while the Nasdaq traded down by more than 4 percent.

US officials started to negotiate with Venezuela to lift sanctions and deliver oil directly to the US markets. The United Arab Emirates called on its Opec partners to increase production sooner than later. These two developments saw prices for oil dropped strongly since last Wednesday.

ICE Brent had its biggest daily drop of 13.16 percent on Wednesday and traded more than $20 lower on Friday than the opening on Monday on $111 per barrel. Expectations that the oil price may drop below the $100 per barrel again next week, and the “expected” US inflation rate contributed to a strong recovery in equity prices last Thursday and Wednesday.

On Friday, the Dow Jones Industrial index however ended 0.7 percent lower and is down 2 percent for the week and is now trading 9.3 percent lower since the beginning of the year. The Nasdaq lost 3.5 percent last week, trading 16.3 percent lower year-to-date.

Financial shares improved strongly and the FIN15 index increased 2.5 percent. The strong decrease in the prices of commodities on the back of the much lower oil price had led to a strong sell-off of commodity shares last week. The resources 10 index dropped by 4.4 percent and the all share index ended the week 0.9 percent lower but is for the year only 23 points lower on 73 709.

The rand improved strongly against the dollar (40 cents) to R15.02 and is now 95 cents stronger than the R15.97 level at the beginning of the year. Against the pound the currency appreciated by 73 cents last week to R19.67 and is now 192 cents stronger than the R21.59 on 31 December 2021.

This coming week, South Africa’s retail sales for January and the consumer confidence index for first quarter will be released on Wednesday.

On foreign markets all eyes will be on the Federal Open Market Committee (FOMC) decision on US interest rates on Wednesday. This decision will set the tone for financial markets the rest of the month. It is expected that the FOMC will increase its bank rate with 0.25 percent.

The UK will announce its latest unemployment rate on Tuesday. The US will publish its producer price inflation rate and its retail sales for February on Wednesday. The European Central Bank (ECB) chairperson Christine Lagarde will deliver her address on Thursday. The US will also announce various house data during the week, like new building permits, new and existing home sales numbers.

* Dr Chris Harmse is the economist at CH Economics and lecturer at the School of Commerce at Stadio Multiversity.

** The views expressed here are not necessarily those of the DFA.

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