Week in Review: A Volatile Start to 2022

There was a clear rotation with growth sectors like technology and discretionary stocks underperforming, while value orientated sectors like energy and financials held steady. Minutes from the December Fed meeting were released on Wednesday, revealing that policymakers had discussed quicker and more aggressive rate hikes, with the first rise in the benchmark interest rate expected as soon as March. Federal Open Market Committee members also discussed starting to shrink the central bank’s balance sheet soon after their first hike.

Mixed employment related data flowed out of the U.S. this week. The U.S. economy added only half the expected number of jobs in December with nonfarm payrolls rising by 199 000. U.S. unemployment fell to 3.9%, lower than the expected 4.2%, nearing pre-pandemic levels. Adding to the conflicting data, a record 4.5 million Americans quit their jobs in November.

Eurozone headline inflation, released on Friday, hit a record level of 5% in December. This comes after November’s all-time high of 4.9%, with surging energy and food prices fuelling the move. This print raises more questions about the European Central Bank’s monetary policy and what they are going to do to combat persistent inflation.

China’s 2021 woes have continued into the new year, with its economic growth estimated to have slowed to the weakest level in a year, according to China International Capital Corp (CICC). China’s December Covid-19 outbreak coupled with the country’s zero-tolerance towards Covid heavily impacted consumption in Q4. The CICC estimated the world’s second largest economy expanded by 4.1% y.o.y, down from the previous projection of 4.5% growth. China’s property sector continues to feel the heat, as a housing slump and high debt levels amongst cash-strapped property developers has resulted in some developers either defaulting or asking creditors for a payment delay.

In Covid-19 related news, Hong Kong initiated a restriction on operating hours for bars and restaurants, announcing that they will have to close from 6 pm. The country also banned flights from the U.S., U.K. and six other nations. Germany’s health minister Karl Lauterbach has hinted that further restrictions may be needed to help curb an uptick in cases. Covid testing rules in the U.K. will be relaxed from Jan. 11, even though cases remain at record levels. Ministers in the U.K. are also considering dropping pre-departure Covid tests for visitors, a move that would bring some relief to airlines and the tourism industry.

U.S. stocks fell from record highs this week as interest rate fears took a toll on growth stocks. The Nasdaq suffered its biggest weekly decline in almost a year, down 4.53%. The S&P500 (-1.87%) and Dow Jones (-0.29%) also ended lower. Stocks in Europe managed a slight gain, with the Euro Stoxx 50 rising +0.18% and the FTSE 100 climbing +1.36% - ahead of its international peers. Asian indexes dipped, with the Nikkei 225 down -1.09% and Shanghai Composite Index down -1.66%. Brent crude had a strong week, ending up 5.14%, while Gold sunk -5.22%.

Market Moves of the Week

South African politics was in the spotlight this week, as part one of the much-anticipated State Capture report was released and handed over to President Cyril Ramaphosa by acting chief justice Raymond Zondo on Tuesday. The first report is divided into three volumes, addressing: the corruption that led to the destruction of SAA, the Gupta family’s New Age newspaper and how it was wrongfully used to receive sponsorships and advertising rent from the state-owned Government Communication and Information System, and lastly how SARS was captured and the state procurement system exploited.

The Zondo Commission, additionally, called out Nedbank for their involvement in a complex funding deal for Airports Company SA. Nedbank’s name was mentioned more than 50 times in the first part of the report. As a result, the Commission has suggested that SA law enforcement investigate Nedbank’s involvement in the deal, citing the company’s participation as “disturbing”. Nedbank however has denied any wrongdoing.

A fire broke out at the parliamentary complex in Cape Town last Sunday, which spread from the third floor of the National Council of Provinces building to the National Assembly. The fire ended up destroying the new National Assembly building and the offices of lawmakers. The building’s sprinkler system had not been functioning properly and the CCTV system was not being monitored in the time leading up to the start of the fire. A 49-year-old male suspect was arrested and will remain in custody until 11 January while further investigation into the circumstances of the fire is undertaken.

On the economic front, South Africa’s IHS Markit Purchasing Managers’ Index for December was released on Wednesday, dropping below the neutral 50 point territory to 48.4 and down from 51.7 in November. This drop signals a decline in business conditions and activity which could potentially be explained by the latest Omicron wave.

The JSE All-Share index managed a modest gain over the week (+0.31%) while the Rand strengthened to end at $/R 15.59.

Chart of the Week

The ISM Supply Managers Survey has consistently shown elevated worries about inflation, and was the first significant indicator to signal a reason to be alarmed about inflation last year. It recently dropped from 82.4 to 68.4, the biggest one-month decline in more than a decade. This suggests supply constraints may have eased significantly, signalling a potential slowdown in future inflation. Source: Bloomberg