The Market Snapshot provides an overview of key events that influenced financial markets over the course of February 2022.
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Widespread risk aversion dominated global markets in February following Russia’s surprise invasion of the Ukraine. Western countries joined efforts to impose stringent sanctions on the invading state, sparking concerns over rising energy prices given Russia’s status as the third-largest producer of petroleum, and the subsequent impact this would have on global inflation. US, Treasury bonds and gold rallied, while the price of Brent Crude jumped 10.7% (in USD). Further pressure on investor sentiment came in the form of the US Federal Reserve signalling that it would start raising interest rates as soon as March to help curb inflationary pressure, which prompted bond weakness. In Asia, the Chinese government ramped up its regulatory crackdown on tech stocks, pushing the sector and the index into negative territory. Turning to South Africa, the local equity bourse benefited from rising commodity prices, while global emerging markets sold off broadly in line with market risk-off sentiment.
Looking at global equity market returns (all in US$), the MSCI All Country World Index returned -2.6% for the month. Developed markets outperformed emerging markets, with the MSCI World Index returning -2.5% and the MSCI Emerging Markets Index delivering -3.0%.
The spot price of Brent crude oil closed the month 10.7% higher at around US$100 per barrel as concerns over the disruption in supply due to sanctions on Russia increased global demand. Metals were broadly positive in February in light of the risk-off sentiment, with platinum returning 3.8%, copper 3.7%, palladium 3.1%, aluminium 12.2%, gold 5.9% and nickel 10.7%.
The Federal Reserve (the Fed) signalled that it could raise interest rates as soon as March on the back of rising inflation and improved labour market conditions. Annual inflation in the US accelerated to well above the Fed’s 2% long-run objective, spiking to 7.5% in January in the wake of soaring energy prices and supply disruptions, and marking the highest reading since February 1982. Unemployment, meanwhile, reached a pre-pandemic low of 3.8% in February, down from the 4% recorded in the previous month, while labour participation also improved, edging up to 62.3%.
The news dominating market sentiment, however, was the invasion of Ukraine by Russian forces on 24 February. Risk assets sold off sharply as investors sought the stability of safe-havens, with the yield on the benchmark 10-year US Treasury bond falling to a low of 1.8% at month-end. The Biden administration largely led the way in terms of Western sanctions against Russia, the most prominent including cutting the Russian central bank off from US dollar deposits and the removal of key Russian banks from the interbank messaging system, SWIFT, in an effort to sever Russia from the broader global financial system.
Equities closed the month lower, with the S&P 500 returning -3.0%, the Dow Jones Industrial Average -3.3%, and the technology-heavy Nasdaq Composite -3.3% (all in US$).
Investors largely welcomed Finance Minister Enoch Godongwana’s good news Budget Speech, which reaffirmed the government’s commitment towards growth and fiscal sustainability. The Finance Minister announced a reduction in the company tax rate to 27% in a bid to help stimulate the economy, while unveiling plans to narrow the budget deficit and stabilise debt. On a less positive note, credit ratings agency Fitch warned that the country was not doing enough to contain its rising debt despite the better-than-expected revenue windfall.
Turning to economic indicators, annual inflation eased to 5.7% in January from a near five-year high of 5.9% in December, and still within the SARB’s 3-6% target range. Manufacturing PMI increased to 57.1 in January from 54.1 the previous month; while retail sales advanced to 3.1% y/y in December, above market estimates of 2.7% y/y and the fourth straight month of positive growth.
The FTSE/JSE ALSI returned 2.9% in February. The largest contributor to performance was the Resources sector, which gained 16.1% on the back of stronger commodity prices. The only other positive performer for the month was Financials with 3.8%. Detracting from returns were Listed Property with -3.0% and Industrials with -7.4%. The FTSE/JSE Capped SWIX All Share Index, which we use as the equity benchmark for most of our client mandates, returned 2.7%. SA bonds (as measured by the FTSE/JSE All Bond Index) delivered 0.5%, SA inflation-linked bonds returned 2.1% and cash (as measured by the STeFI Composite) delivered 0.3%.
Finally, the rand gained 0.3% against the US dollar, 0.4% against the pound sterling, and was flat against the euro.
The United Kingdom and Europe
The Bank of England raised its key Bank Rate by 25bps to 0.5% in February, marking the first back-to-back increase since 2004, while signalling that further tightening could be appropriate in the coming months. In addition, the Committee also voted to begin reducing its government bond purchases. Meanwhile, annual inflation in the UK edged higher to 5.5% in January, the highest reading since March 1992. The central bank expects inflation to increase further in the coming months, peaking at around 7.0% in April before falling back to within range of its 2% target in the second half of the year. In other news, the UK economy expanded by 1% q/q in Q4 2021, slightly below forecasts of a 1.1% q/q rise.
Turning to the Euro Area, the European Central Bank maintained key interest rates at record low levels in February, however, signalled that it would discontinue its net asset purchases at the end of March, despite a record rise in inflation. Annual inflation in the Euro Area accelerated to 5.1% in January, its highest level on record, with Energy remaining the biggest contributor (up 28.8%).
For the month, the UK’s FTSE 100 returned 0.3%, Germany’s DAX -6.3% and France’s CAC 40 -4.7% (in US$).
China and Japan
Chinese equity markets closed the month lower on the back of rising commodity prices and new regulatory crackdowns on tech stocks. Sanctions against Russia saw a sharp rise in commodity prices, which had an adverse effect on the Chinese market given its strong reliance on commodity imports. Meanwhile, tech stocks came under pressure after authorities announced a new series of regulatory moves to keep financial risks under control – particularly targeting the “metaverse” – which has become a growing trend among tech companies globally.
In other news, the People’s Bank of China kept interest rates steady in February following two consecutive months of rate cuts; annual inflation fell to 0.9% in January from 1.5% a month earlier, and China’s “zero-COVID” curbs continued to add strain to the region’s supply chain issues.
Turning to Japan, risk-off sentiment saw the bourse close lower in February, with the Japanese government joining Western countries in opposition to Russia’s occupation of the Ukraine, despite its reliance on Russian oil. Prime Minister Fumio Kishida, however, assured market participants that Japan had sufficient oil reserves and liquefied natural gas so that there would be no significant impact on energy supplies in the short term.
Japan’s Nikkei 225 delivered -1.7%, the MSCI China -3.9%, and Hong Kong’s Hang Seng -4.8% (in US$).
Video and adapted article by M and G Investments