VIDEO: Market Snapshot March 2022

Our Market Snapshot provides an overview of key events that influenced financial markets over the course of March 2022.

Global equity markets were largely mixed in March, as investors grappled with the prospect of rising inflation, policy tightening across central banks, and the potential impact of the Russia-Ukraine war on fuel supply and energy costs. In the US, the Federal Reserve raised its key interest rate, sparking a sharp spike in longer-dated bond yields as investors sold off government debt, while equity markets received some reprieve in the form of a potential ceasefire between Russia and the Ukraine. In the UK, investors faced a third consecutive rate hike with inflation having reached a 30-year high. While locally, risk-off sentiment saw the local bourse close the month flat, despite stronger commodity prices.

Looking at global equity market returns (all in US$), the MSCI All Country World Index returned 2.2% for the month. Developed markets outperformed emerging markets, with the MSCI World Index returning 2.8% and the MSCI Emerging Markets Index delivering -2.3%. The Bloomberg Global Aggregate Bond Index (US$) returned -3.0%, while the EPRA/NAREIT Global REIT Index (US$) produced 5.6%.

The spot price of Brent crude oil closed the month 6.8% higher at around US$106 per barrel as the prospect of supply disruptions offset the release of additional reserves by the US. US President Biden ordered the release of up to 180m barrels of oil over six months from America's reserves in an effort to bring down high fuel costs. Metals were broadly positive in March in light of the risk-off sentiment, with nickel returning 32.3%, copper 3.6%, gold 1.9% and aluminium 1.5%. Platinum and palladium were among the only outliers, returning -6.1% and -7.9% respectively.

US

The Federal Reserve (Fed) raised the federal funds rate by 25bps to a range of 0.25%-0.5% during its March meeting, signalling a further six hikes for the remainder of the year. This marked the first increase in borrowing costs since 2018. The central bank noted that the impact of the Russia-Ukraine war on the US economy remained highly uncertain, however, it would most likely create additional pressure on inflation and economic activity. The economy is now expected to grow 2.8% this year, well below December’s forecast of 4%, while annual inflation accelerated to 7.9% in February, the highest reading since January 1982. The Fed also signalled that they would reduce their holdings of Treasury securities and agency debt and agency mortgage-backed securities at their next meeting. Meanwhile, the yield on the benchmark 10-year Treasury note approached an almost three-year high of 2.56% in anticipation of the Fed’s interest rate decision, and the prospect of further policy tightening.

Equity markets rallied on the back of a potential cease-fire between the Ukraine and Russia. Market sentiment lifted after Russia said it would scale down military operations in Kyiv, while the Ukraine proposed adopting a neutral status in steps toward negotiating peace. 

n other news, the US unemployment rate edged down to 3.8% in February, below market expectations of 3.9%. Non-Manufacturing PMI fell for a third consecutive month to 56.5 in February, well below market forecasts of 61 as logistical challenges and supply constraints continued to persist. While in more positive news, Manufacturing PMI increased to 58.5 in March, above market forecasts of 56.3 and pointing to the strongest growth in factory activity in six months on the back of stronger domestic and foreign demand. Services PMI rose to 58.9 in March, well above market consensus of 56, amid a solid rise in new business supported by increased demand and the easing of Covid-19 restrictions.

Equities closed the month higher, with the S&P 500 returning 3.7%, the Dow Jones Industrial Average 2.5%, and the technology-heavy Nasdaq Composite 3.5% (all in US$).

South Africa

The South African Reserve Bank (SARB) raised its benchmark repo rate by another 25 bps to 4.25% at its March meeting, marking the third consecutive hike in a bid to curb increased inflationary risks. Policymakers said that the overall risks to the medium-term growth outlook were assessed to be balanced, while the risks to the inflation outlook were assessed to the upside. For 2022, headline CPI was revised sharply higher to 5.8% from 4.9% in January, primarily due to higher food and fuel prices. Meanwhile, GDP growth projections were revised higher from January’s estimates, with the economy now expected to expand by 2% in 2022 and 1.9% in 2023, above earlier estimates of 1.7% and 1.8% respectively.

For the three months to December 2021, South Africa’s GDP advanced by an annualised 1.2% q/q, slightly below market estimates of a 1.3% rise, and well above the upwardly revised 1.7% contraction recorded in the previous quarter. This meant that for the full 2021 year, the South African economy expanded by 4.9%, the most in 14 years. Meanwhile, annual inflation remained unchanged at 5.7% in February, slightly below market expectations of 5.8% and still within the SARB’s 3%-6% target range, albeit on the upper limit. Gasoline prices remained a primary driver behind the rise in costs, reaching an all-time high of 1.48 USD/litre in March from 1.31 USD/litre in February. Meanwhile, manufacturing activity expanded for the seventh straight month and at its strongest pace since March 2007, after the Purchasing Managers’ Index increased to 58.6 in February from 57.1 the previous month. Output and new orders helped lift the index, increasing at a faster pace on the back of a rise in demand, especially from abroad.

The FTSE/JSE ALSI was flat, returning 0.0% in March. The largest contributor to performance was the Financials sector which gained 12.0%, while Listed Property gained 4.4%. Detracting from returns was the Resources sector with -1.1% and Industrials with -4.3%. The FTSE/JSE Capped SWIX All Share Index, which we use as the equity benchmark for most of our client mandates, returned 1.5%. SA bonds (as measured by the FTSE/JSE All Bond Index) delivered 0.5%, SA inflation-linked bonds returned -0.7% and cash (as measured by the STeFI Composite) delivered 0.4%. 

Finally, the rand appreciated sharply against the major currencies, gaining 5.4% against the US dollar, 7.2% against the pound sterling, and 6.2% against the euro. This would have detracted from foreign currency investment returns for the month.

UK and Europe

The Bank of England (BoE) delivered its third consecutive rate hike in March, raising its key bank rate by 25bps to 0.75%, thereby bringing borrowing costs back to within pre-pandemic levels.

Policymakers warned that inflation could increase further to around 8% in the second quarter of 2022, and perhaps even higher later in the year. Annual inflation is currently running at its highest level since March 1992, after having increased to 6.2% in February from 5.5% in January, well above market forecasts of 5.9%. The BoE said that the shock to inflation-adjusted incomes in Britain from rising energy prices will be larger than every single year in the 1970s. Gasoline prices in the UK increased to 2.14 USD/litre in March from 2.01 USD/litre in February, the sharpest increase since September 2014.

The European Central Bank (ECB) kept interest rates at record low levels in March, however, surprised the market by announcing that it would speed up its asset purchase schedule over the coming months, potentially bringing the programme to an end by the third quarter if there was no further weakening to the inflation outlook over the medium-term. The ECB now sees inflation rising to 5.1% for 2022, above its earlier projection of 3.2%, while GDP growth for the year is expected to expand by 3.7%, down from previous estimates of 4.2%.

Meanwhile, annual inflation in the Euro Area surged to an all-time high of 7.5% in March, well above market forecasts of 6.6% and significantly higher than the 5.9% recorded in February. This marked the highest recording for the fourth consecutive month, as the war in the Ukraine and sanctions on Russia pushed fuel and natural gas prices to record levels. The inflation rate in the Euro Area is now more than three times above the ECB’s target of 2%.

For the month, the UK’s FTSE 100 returned -0.5%, Germany’s DAX -1.3% and France’s CAC 40 -0.8% (in US$).

China and Japan

The People's Bank of China kept its benchmark interest rates unchanged for corporate and household loans in March, as widely expected. The central bank reaffirmed its commitment to provide accommodative support to key areas in the economy if needed, amid volatile internal and external conditions.

Equity markets continued their sell-off amidst increasingly uncertain conditions, particularly around the government’s harsh lockdown measures to fight the Coronavirus across different regions, its approach to establishing a “common prosperity” economy, restrictive regulations imposed on major tech companies, and increasingly close ties with Russia. 

On the data front, investors digested reports showing a sharp contraction in China’s services sector activity, as the economy continued to reel from Covid outbreaks and related curbs. Authorities further extended its national lockdown restrictions despite growing anger over quarantine rules. For March, Services PMI and General Manufacturing PMI fell to two-year lows of 42 and 48.1 respectively. Unemployment increased to 5.5% in February, marking the third consecutive increase for the year, while inflation stood at 0.9% in February, unchanged from the previous month and in line with market forecasts.

In Japan, the Bank of Japan kept its key short-term interest rate unchanged during its March meeting, as widely expected. The central bank highlighted that Japan's economy had picked up despite some weakness following the pandemic and supply-side issues, however warned of fresh risks from the Russia-Ukraine war, which was destabilising financial markets and pushing up raw material costs. Japan’s GDP growth was revised lower to 1.1% q/q for Q4 2021 compared to initial estimates of a 1.3% q/q expansion, as pressures from a sharp increase in new Covid infections and rising energy costs weighed on the economy. Japan’s annual inflation rate rose for a sixth consecutive month to 0.9% y/y in February, compared to 0.5% a month earlier.

Japan’s Nikkei 225 delivered 0.4%, the MSCI China -8.0%, and Hong Kong’s Hang Seng -3.0% (in US$).