Global Financial Markets in Brief- Week of March 7

According to a weekly report released by the Arab Federation of Capital Markets (AFCM), global stock markets generally declined, with technology stocks leading the losses. Concurrently, the US inflation rate is close to 8%, making it almost certain that the Federal Reserve will raise interest rates next week, while the European Central Bank is accelerating the end of its large-scale stimulus program. Oil prices fell last week after a US official stated that Russia may show a willingness to engage in substantive negotiations regarding the Ukraine issue, and traders were also assessing the potential improvement in supply prospects disrupted by the Ukraine crisis.

Gold prices retreated last Friday as the safe-haven appeal of gold diminished due to the possibility of progress in negotiations between Russia and Ukraine. Additionally, the impending US interest rate hike also put pressure on gold prices, although gold subsequently rebounded to nearly $2,000 per ounce. The US dollar exchange rate reached a two-year high after the release of a strong US inflation report.

The US 10-year Treasury yield rose above 2% on Thursday, driven by inflation data that was slightly higher than expected. The benchmark 10-year Treasury yield surpassed 2% for the first time since February 25th. The 30-year Treasury yield rose to 2.374%. In fact, the Consumer Price Index (CPI), which measures a basket of goods and services, rose 7.9% over the past 12 months, a 40-year high. Economists surveyed by Dow Jones had previously predicted that the annual overall inflation rate would rise by 7.8% and the monthly inflation rate by 0.7%.

On Friday, the US dollar exchange rate reached a two-year high after the release of a strong inflation report, while the euro struggled to maintain its position as the European Central Bank's hawkish shift was offset by growth risks stemming from the Ukraine crisis. The European Central Bank stated on Thursday that it would gradually phase out stimulus measures in the third quarter, opening the door for interest rate hikes before the end of 2022 to combat soaring inflation. According to Dr. Fadi Kanso, Head of Research at AFCM, the dollar rose to 116.39 yen against the Japanese yen in early trading, the highest level since January 2017, while the pound fell to $1.309, plunging 0.8% overnight, a 16-month low.

Analysts believe that Russia's war against Ukraine will further push up global inflation as it drives up the prices of oil and other commodities. Goldman Sachs lowered its 2022 US real gross domestic product growth forecast from +2.0% to +1.75% to reflect higher oil prices and other growth headwinds related to the war in Ukraine. While the market widely expects the Federal Reserve to raise the federal funds target rate by 25 basis points at the end of its monetary policy meeting next week, the CPI data suggests that the Federal Open Market Committee may take “more aggressive” measures to curb inflation, as Fed Chairman Jerome Powell pledged last week.

On Friday, Asian stock markets continued the global downturn, with a sell-off in Chinese stocks emerging after US-listed Chinese stocks plummeted following the release of the first list of Chinese companies that may be delisted in the US. The broadest MSCI index of Asia-Pacific stocks excluding Japan fell 1.7%, and the decline on Wall Street spread to many of the region's benchmark indexes, which all fell sharply.

Oil prices suddenly fell on Wednesday, giving up some of the gains this month, due to supply disruptions caused by Russia's invasion of Ukraine. West Texas Intermediate (WTI) crude oil plunged more than 12%, closing at $109 per barrel, its worst day since November 26th. Earlier this week, WTI briefly broke through $130 per barrel, a 13-year high. The international benchmark Brent crude oil fell a similar 13% to $111 per barrel, the largest single-day drop since April 2020. Brent crude oil had just reached $139 per barrel on Monday, its highest level since 2008. This occurred after geopolitical tensions escalated, with US President Joe Biden announcing on Tuesday that the US would ban imports of Russian oil in response to Moscow's invasion of Ukraine, and the UK also announcing its own restrictions, stating that it would phase out the country's imports of Russian oil by the end of the year.

In fact, oil prices have retreated somewhat after it became clear that the European Union, which is heavily reliant on Russian energy, would not join the US and UK in banning Russian oil. The fluctuation in oil prices occurred amid signs that the US may be making progress in encouraging other sources to increase oil production. Reuters reported that Iraq said it could increase production if OPEC+ asked. US Secretary of State Antony Blinken also stated that the UAE would support OPEC+ increasing production. Additionally, some OPEC+ oil-producing countries, including Angola and Nigeria, have been struggling to meet their production targets, further limiting the group's ability to make up for lost Russian supplies.

Spot gold rebounded to $1,996 per ounce after falling as much as 3% on Wednesday. US gold futures closed at $2,000 per ounce. Earlier this week, the pursuit of safe-haven assets had pushed gold prices to near the record levels set in August 2020. Investors also assessed US inflation data for February, which was in line with expectations but also showed the largest year-on-year increase since January 1982. Furthermore, talks between the foreign ministers of Russia and Ukraine made no apparent progress on a ceasefire, thus dampening the appetite for investment in riskier assets. Palladium, which is used by automakers in catalytic converters to reduce emissions, rose to $2,949 per ounce. The metal's price hit a record high of $3,441 per ounce on Monday due to concerns about supply disruptions from major producer Russia. Amid soaring oil and commodity prices, investors are now awaiting the Federal Reserve's next policy statement on March 16.

Meanwhile, coal prices may surpass $500 per ton in 2022 due to soaring natural gas prices, which may lead European countries to switch to coal. EU leaders met on Thursday to develop a common response to Russia's invasion of Ukraine but differed on the strength of economic sanctions. In fact, about 14% of global coal exports come from Russia, making it the world's third-largest exporter of this strategic commodity, which is widely used for power generation and energy-intensive manufacturing. As of 2020, coal accounted for more than 27% of global energy consumption, second only to oil at 31%.

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