MARKETS REMAIN EXTREMELY VOLATILE AS THE WORLD TRIES TO ADJUST TO RUSSIAN AGGRESSION

MARKETS REMAIN EXTREMELY VOLATILE AS THE WORLD TRIES TO ADJUST TO RUSSIAN AGGRESSION

This week the ongoing war in Ukraine is still dominating everyone’s attention. As feared after the initial assault stalled, the Russian military has resorted to inflicting maximum damage on civilian infrastructure and population centres. That Russia should choose to deliberately inflict mass casualties – including targeting fleeing refugees in what had been agreed safe zones – is unconscionable but shouldn’t have been surprising. The mass human suffering inflicted in both Chechnya and Syria shows this is standard procedure.

How to process and respond to what is happening is causing a huge amount of turmoil. How to manage millions of Ukrainian refugees, how to assist the Ukrainian defence effort and how to rapidly replumb the global trade and financial systems to exclude Russia are problems troubling the smartest minds in both finance and politics, and in a few places the weakest minds as well. What the impact of these moves will be is unknowable, and rapid movements in markets are to be expected, but by far from the most serious impact.

COMMODITIES: RAW MATERIALS SURGE AS FIGHTING IN UKRAINE INTENSIFIES

Commodities had another volatile week as the invasion in Ukraine continues. Brent Crude hit $139 per barrel earlier in the week following the US ban on Russian oil and gas imports and the UK’s plan to phase out Russian oil imports by the end of the year. The European Union also started urgent talks to reduce dependency on Russia for oil and gas. However, the sharp rise was reversed after the UAE’s energy minister called on Opec+ countries to boost production to contain energy prices.

The most dramatic movement was seen in nickel as prices doubled, briefly reaching above $100,000. The metal was trading around $20,000 a ton in early January. The trading of nickel was suspended on the London Metal Exchange as a result. Although the rise is significant it only impacts a small number of market participants as the commodity is mostly traded off market. Russia produces less than 10% of global supply. Therefore, while this looks very dramatic, the impact will be limited.

BONDS: GOVERNMENT BONDS FALL AS INFLATION CONCERNS RESURFACE

Government bonds yields rose sharply this week as attention turned back to inflation. Yields have fallen in recent weeks as investors looked for safety and this pushed up bond prices. The spectre of inflation remaining high, in part due to high commodity prices caused by the war, has caused markets to reassess the outlook for central bank interest rates. US consumer inflation was 7.9% in February, the highest reading in 40 years, driven by rising petrol and food prices. Markets are expecting a 0.25% rate hike from both the Bank of England and the US Fed next week and expectations are rising that rates will be tightened more aggressively over the course of this year.

The European Central Bank has been more dovish. It remains further from tightening than the UK and US but it contributed to the sell-off in government debt by announcing tapering of its asset purchases would be accelerated. Markets are now expecting a first rate hike from the ECB in Q4 this year, helping push bond yields back up to the level of a month ago.

EQUITIES: EQUITY MARKETS BUFFETED BY CONFLICTING SENTIMENTS

Global equity markets have endured another dramatic week and sentiment has switched rapidly as investors try to assess the impact of the news coming from Ukraine. Several major equity markets saw a 10% correction as investors adopted a risk-off attitude early in the week, with European markets particularly affected. However, a rapid change in attitude mid-week saw a reverse of some of the recent losses with many markets gaining 3% or more on Wednesday. Markets were in risk-on mood again on Friday helped by stronger economic news. There was better than expected inflation numbers in Germany and UK GDP growth was higher than expected at 0.8% in January.

The corporate exodus from Russia continues as the list of global companies pulling out grows by the day. This week Goldman Sachs and JP Morgan joined Heineken, McDonalds and Imperial Tobacco in halting operations in Russia. Separately, Russia appears to be on the verge of a default on its government debt as sanctions continue to bite.