Key market drivers: 7 - 11 March 2022

In this week’s report we discuss the potential implications of global developments on inflation, load shedding, growth and financial market dynamics. In the week ahead, unfolding developments in the Russia/Ukraine war and the FOMC meeting will be closely monitored.

Market dynamics

  • The price of Brent crude has accelerated by 41% since the start of 2022, of which 16% transpired since the start of the Russia/Ukraine war. The oil price hit an intraday high of $139/bbl but has subsequently receded to $112/bbl. The prospects of sanctions on Russia’s energy exports (oil, gas and coal) have resulted in unprecedented volatility. OPEC is estimated to have~4m/bpd in spare capacity, which is utilised to offset Russian crude oil exports, which would leave global supply unable to respond to other supply shocks. Further, inventories are below the five-year averages.
  • Inflation volatility risk in 2Q is elevated because of the high variance in the oil price that is causing the daily underrecovery to record wide swings (from 206c/l to 338c/l). The 2022 CPI inflation forecast has been revised from 5.4% to 6.1%, assuming an oil price of $110/bbl in 2Q 21 and $90/bbl in 2H 21. Scenarios assuming the oil price at $120/bbl, $150/bbl and $200/bbl and a return to $90/bbl in 2H22 could see headline inflation accelerate to 7.1%, 7.5% and 10.9% in April/May.
  • Load shedding of Level 2 to 4 was reinstated, with unplanned outages at new Medupi and Kusile units. This raised OCGT diesel-fired power plants to a daily factor of around 24%, well above Nersa’s allowance of 1% for planned load shedding. The situation remains challenging: daily diesel consumption is very expensive, at R175m a day. Added to this is the risk of Stage 6 to 8 load shedding if diesel and peaking pump storage of 2 700MW are not replenished.
  • Basis spreads narrowed after Russian banks were banned from the Swift payment system.
  • FRA rates reprice higher inflation risk, with the 3x6 FRAs indicating two rate hikes of 50bps each at the March and May MPC meetings.
  • Swap rates rise across the maturity spectrum as selling of SAGBs is hedged.
  • SAGB yields rose by 100bps between 23 February to 8 March, driven by forced selling by non-residents (to cover margin calls to Russian exposure) and short selling by hedge funds. Short -covering towards the end of the week exacerbated the retracement. There was a disconnect between the ZAR and SAGB yields earlier in the week, with the ZAR strengthening and bond yields rising. The ZAR was buffered by exporters repatriating USD and non-residents unwinding FX hedges.
  • ASW spreads consolidated at the start of 2022, i.e., the 5yr R186 spread traded at -92bps, on the back of coupon payments on SAGBs and risk-on trades. At the beginning of March, the spread widened to -178bps, the widest level in 12 months.