Friday marked 100 days since Russia’s invasion of Ukraine and still, no clear end is in sight. The sombre milestone comes at a time when Kremlin forces advance in the east and now control around 20 percent of Ukrainian territory, according to President Volodomyr Zelenskyy. Western allies have ramped up their aid via sanctions and military support, as Moscow’s forces slowly make progress against Ukrainian resistance. During the week, Europe embargoed Russian seaborne oil while U.S. President Joe Biden said that he’ll give Ukraine advanced rocket systems and other US weaponry to better hit Russian targets. 

In the U.S., Nonfarm payrolls, released Friday, rose more than expected in May (390 000 vs est. 328 000) while the unemployment rate held steady at 3.6%. Average hourly earnings increased 0.3%, less than expected but still up 5.2% from a year ago. The market expects these robust numbers to keep the Fed on track for raising rates by 50bps at each of its next two meetings. 

Recent mixed comments from Fed officials as well as difficult to decipher inflation signals have made it difficult to say whether or not inflation has peaked following a slight decline in the Consumer Price Index (CPI) in April. Speculation grew over the week that the Fed might pause rate hikes in September, however, the market’s aware that the Fed remains extremely data dependent and will therefore be focused on May’s CPI print which is set to be released next Friday.

Eurozone inflation soared to a fresh record high in May, accelerating more than expected to 8.1% y/y, up from April’s high of 7.4%. Price pressures spread more broadly across the economy, with the core inflation rising by 3.8%. Producer price data, released Thursday, also showed a spike in prices as the index jumped 37.2% in April from a year ago. These sharp price increases are placing pressure on the European Central Bank to make a move and tighten monetary policy to bring inflation under control.

In other European news, Gazprom, Russia’s state-owned energy company, cut off gas supply to the Netherlands following the country’s refusal to pay the Soviet Union in rubles rather than dollars. Earlier this month, Russia halted supplies to Poland, Finland and Bulgaria.

On a more positive note, signs that global supply chains are untangling have begun to emerge with the global manufacturing sector showing strength in May, shrinking in only five of the approximately 50 countries in which purchasing managers’ index surveys are compiled.

China doubled down on its Covid Zero strategy this week, just as Shanghai and Beijing emerge from harsh lockdowns. A network of tens of thousands of lab testing booths is being built in the region’s most economically crucial cities. Negative results will be needed to get into public facilities (subways etc.) and even stores. In an attempt to avoid a Covid-fuelled economic contraction this quarter, Chinese officials have vowed to implement a bundle of government policies to stimulate growth, while the People’s Bank of China has promised to accelerate its plans to employ expansionary monetary policies. 

U.S. stocks surrendered a portion of the previous week’s strong gains as investors continued to question the Fed’s path and ability safely rein in inflation. Major U.S. indices’ ended the week down with the S&P 500 Index taking the biggest hit (-1.20%), followed by the Nasdaq (-0.98%) and Dow Jones (-0.94%). Shares in Europe (Euro Stoxx 50) dipped by -0.66%, while the FTSE 100 fell by -0.69%. Chinese stocks rallied after support measures to help strengthen the economy were announced, with the Shanghai Composite up 2.08%. Japanese stocks rebounded strongly, ending the week up 3.66% (Nikkei 225). Brent crude jumped 4.99%, while Gold (+0.12%) held steady.

Market Moves of the Week:

South Africa’s trade surplus shrank in April to R15.49 billion, down from R47 billion in March. The decline was unsurprising, given the logistical and production disruptions caused by the devastating floods in KwaZulu-Natal, volatile commodity prices, an unstable ZAR, and increased loadshedding in April. 

The Quarterly Labour Force Survey (Q1 of 2022) was released on Tuesday, revealing that the official unemployment rate remained at elevated levels but dropped slightly to 34.5% in Q1 of 2022, from 35.3% in 4Q21. The government’s temporary employment program helped boost employment over the period, however, unemployment remains higher than it was a year ago.

On a positive note, Local Purchasing Managers’ Index (PMI) data for May showed a significant recovery in domestic activity after KwaZulu-Natal’s devastating floods and intense load-shedding hurt output and demand in April. Absa PMI rose to 54.8 in May from 50.7 in Aril, pointing to the 10th straight month of expansion in manufacturing activity. “Despite the solid rebound in demand, business activity was stuck just below the neutral 50-point mark in May,” Absa said. 

South Africans will be pleased to hear that the temporary reduction in the general fuel levy, which was set to expire at midnight on Tuesday, has been extended by two months. The ministers of Finance and Mineral Resources said that “the relief will take the form of a continuation of the relief of R1.50 per litre for the first month, from June 1 to July 6, and then 75c per litre from July 7 to August 2.” The aid is set to cost roughly R4.5 billion, which will be funded by the liquidation of a portion of the strategic crude oil reserves. 

The JSE (+0.62%) had a choppy week but managed to end in the green, unlike most major markets. Industrials (+1.88%) caught a bid due to a bounce in Chinese stocks which helped the likes of Naspers and Prosus, while financials (+1.31%) remained a favourite as positive updates boosted sentiment towards the sector. The rand strengthened over the week to end at R15.54/$.

Chart of the Week:

The chart above plots the best return from a range of 11 different global indexes of stocks and bonds every quarter. The chances that at least one of the 11 will have gained in any quarter are overwhelmingly high. The first quarter of this year, however, was the first time in more than three decades that none of them gained. Source: Ruffer LLP.

Investor anxiety has been heightened recently by the war in Ukraine and impending rate rises by the Federal Reserve. As such, we advise investors to maintain a calm stance during the crisis, diversify, and maintain exposure to long-term themes. Investors need to look beyond near-term news and gain exposure to industries benefiting from longer-term growth trends.