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The year starts on a negative note…
The first week of the year turned out to be much more volatile than one would expect. First, there was an attempted revolution in Kazakhstan. To be more precise, mass protests broke out on January 2 against the doubling of gas prices from 60 to 120 tenge per liter (from 10.1 to 20.3 rubles). Responding to the question of why the government has decided to raise tariffs for the natural resource, the Kazakh energy minister said that low prices will not encourage the growth of natural resource production. In his opinion, the current conditions are not attractive for investors to increase production of the raw material, which has led to a permanent deficit of gas on the domestic market.
It is worth mentioning that the protests started in the Mangistau region and spread rapidly, with political demands from the protesters. On January 4, riots broke out in Almaty. President Tokayev declared a state of emergency in the regions and on the morning of January 5 accepted the resignation of the government. In the afternoon of January 5, Tokayev announced that he had replaced Nazarbayev as head of the country’s Security Council. Moments later, Tokayev asked the Collective Security Treaty Organization (CSTO) for help. Troops from Russia, Belarus, Armenia, Tajikistan, and Kyrgyzstan are part of a peacekeeping contingent. The decision to send peacekeepers was made because of the “threat to the national security and sovereignty of the Republic of Kazakhstan, caused, inter alia, by interference from outside.”
Speaking of the consequences for the country, the work of all banks in Kazakhstan has been suspended due to an “anti-terrorist operation,” Internet disruptions, as well as to protect employees of financial institutions and their clients, the National Bank of the Republic said. Kazakhstan’s businessmen estimated the damage from the riots at more than $90 million. Some 300 businesses were affected by the protests. Most of the damage was to businesses in trade, catering, transport, services, and the financial sector, including ATMs.
Another important topic last week was the OPEC-Russia meeting. As expected, members of the oil cartel voted to increase production by 400,000 barrels. The decision not to deviate from the plan is explained by several factors: firstly, the hope that Omicron will not cause serious consequences for the world economy; and secondly, the recovery of world fuel consumption, the increase in production activity in some Asian countries, as well as the reduction of crude oil stocks in the United States.
The surplus forecast for the full year was also reduced from 1.7 million b/d to 1.4 million b/d. However, OPEC is not concerned about the surplus per se, as global inventories have already fallen below the five-year average. What are the risks to the oil market? The deterioration of the epidemiological situation in the world, tighter restrictive measures, the reinstatement of the Iran nuclear deal, or the release of additional oil reserves from the U.S. strategic reserves. The next OPEC+ ministerial meeting is scheduled for February 2, 2022.
Finally, yet importantly, the minutes of the last Fed meeting were released. Markets were spooked by the fact that the regulator seems poised to raise the benchmark interest rate earlier and at a faster pace than expected. The regulator linked it to the strengthening economy and high inflation. It is expected that the rate could increase three times by 2022.
Overall, a harsher tone from Fed members led to a drop in major U.S. indices, a slight strengthening of the dollar, a rise in Treasuries, and a slight decline in gold. Looking ahead, the Fed’s normalization process is likely to contribute to increased market volatility. Risk assets, particularly growth equities, could come under pressure.
