Last week was another week of turmoil for global equity markets as investors struggle to get to grips with the broader potential impact of the Russian invasion of Ukraine. There was some clear divergence between different regions. European equities saw some respite, bouncing off their lows on some tentative signs of progress in peace talks mid-week (although little progress came from talks). US markets lagged as they caught up with recent losses in Europe and inflationary pressures remain a concern. Asian equities also lagged as COVID-19 concerns continued to weigh on sentiment in China. On the week, the MSCI World Index declined 1.9%; the STOXX Europe 600 Index was up 2.2%; the S&P 500 Index was down 2.9% and the MSCI Asia Pacific was down 4.5%.1
Markets at the Mercy of Headline Risk
Last week saw extreme volatility, particularly in Europe, as investors traded from one headline to the next on the Ukraine crisis.
We saw some aggressive moves higher in European equities on Wednesday after the somewhat perceived improvement in tone around peace discussions. The STOXX Europe 600 Index rose 4.7%, a bigger move than the COVID-19-vaccine discovery day and biggest gain since March 2020. Germany’s DAX was up 7.9%, a clear reversal of recent trends. Given we have recently seen extreme moves lower, markets seem more susceptible to good news than bad news, hence markets squeezed higher. In addition, the fund flow data (Wed to Wed) illustrated how much investors had reduced exposure to European equities, with another record week of outflows of US$13.5 billion for the region’s equities.2
Nothing substantive came from peace talks between the Russian and Ukrainian foreign ministers, with some fairly barbed comments from both sides after the meeting. However, markets were volatile again on Friday after a vague comment from Russian President Vladimir Putin that there had been positive shifts in talks with Ukraine. This was later dismissed by Ukraine, but it was enough to see European equities spike higher and end the week in positive territory. Overall, it demonstrates how nervous investors are around missing any move higher, given that exposure to the region has been reduced sharply in recent weeks.
Looking away from equity markets, commodity markets also remained volatile through the week. Crude oil was in focus, as the United States and United Kingdom announced plans to stop the import of Russian crude oil. In addition, there has been a push to find alternative supply, with the United Arab Emirates reported to be calling on OPEC+ to increase oil production faster that currently projected and, remarkably, the United States is looking at easing restrictions on Venezuela, which could see an additional 400k barrels/day come to market. Of the five million barrels of crude oil Russia exports each day, about 50% goes to Europe. Russian imports account for 8% of total UK oil demand.3 The United States is less reliant, with 3% of imported oil coming from Russia in 2020. With that, West Texas Intermediate crude oil fell 5.5% to US$126.39 last week.
Gas markets were also volatile, although by the end of the week European gas had fallen 30% (still up +65% year-to-date). There was also a little profit-taking in wheat, but concerns over food price inflation remain. The UN Food Price Index is +23% year-to-date, risking increased pressure on consumers globally.4
European bond yields widened (the German bund moved from -10 basis points to +30 basis points [bps] last week)5 and European credit spreads remained wider that recent levels, but still far from the levels since in 2020.
Looking ahead, any progress in peace talks will likely see markets squeeze again. Ukraine President Volodymyr Zelenskyy said there were talks over a possible meeting between himself and Putin. He also said that there were daily video talks between his representatives and the Russians. However, this is against a backdrop of escalating violence in many Ukrainian cities and a widening of Russian bombing targets over the weekend.
Another key date to watch this week is 16 March, when US$117 million in interest payments on a Russian sovereign bond is due to be paid out. Russia has suggested it will pay international holders in “unfriendly countries” in rubles instead of dollars. Fitch downgraded Russia by six notches on Tuesday evening to “C,” citing both domestic measures and foreign sanctions introduced in response to the country’s invasion of Ukraine as making a bond default “imminent”. Other global rating agencies including Moody’s and S&P have also lowered their ratings for Russia in recent weeks, and a number of economists are reducing their growth forecasts for Europe.
Central Bank Focus
Aside from events in Ukraine, it is a big week for central bank meetings this week, including the Federal Reserve (Fed), Bank of England (BoE) and the Bank of Japan to come this week. Last week, the European Central Bank (ECB) surprised the market somewhat with a more hawkish tilt on Thursday. Notably, it dropped the tone implying rates could go lower than current levels and on also pointed to a faster wind down of the Asset purchase Programme, which is now likely to end in the third quarter (vs. expectations of the fourth quarter previously). Unsurprisingly, the ECB cut its growth forecast for 2022 (3.7% vs. 4.2% previously), and hiked its inflation forecast (5.1% vs. 3.2% previously). The market is currently pricing in one rate hike by the end of 2022 now.6
Looking to the week ahead, the market expects both the Fed and the BoE to raise rates by 25 bps. The uncertainty created by the Ukraine crisis has made the chances of a 50 bps rate hike from the Fed a lot less likely, as alluded to by Fed Chair Jerome Powell in recent weeks. However, inflationary pressures are clear, with US Consumer Price Index (CPI) printing at 7.9% (a 40-year high), so the market does still expect six rate hikes by year end.
Week in Review
As discussed, investor focus in Europe has been on the crisis in Ukraine and the recent ECB meeting. As noted, the STOXX Europe 600 Index saw its first weekly gain in four weeks, and Spain’s IBEX rose 5%, while Germany’s DAX rose 5%. Looking at sectors, banks, travel & leisure were strong, while autos lagged.
Italian macro data gives us a good insight into some of the challenges Europe faces, with last week’s January Industrial Production slumping 3.4%. Italian producer price index (PPI) data showed a gain of 12.6% for January and up 41.8% year-over-year.
US equities mirrored the recent weakness in Europe last week, closing the week down nearly 3%. The violence in Ukraine and the subsequent geopolitical tensions continued to be the key focus for investors, as Western governments discussed imposing further sanctions on Russia. Credit markets were also closely watched as an indicator of stock market performance, with US real yields back at the lows, which should make equities appear more attractive. Despite that, in terms of sectors, energy stocks managed to gain last week, despite a dip in oil prices. All other sectors finished lower.
The latest US CPI report showed that inflation was at a 40-year high in February. The report was in line with expectations at +7.9% year-over-year. As expected, energy prices were strong given the recent rises in oil and gas prices. This had a knock-on effect to grocery inflation, rising 1.4%, its strongest increase in four decades. Transportation, rent growth and service inflation all contributed to the strong print. Inflation does appear to be levelling off in the auto sector; however, the sector still faces a number of supply-chain headwinds near term. Whilst the market will remain at the mercy of the next headline on Ukraine, investor attention in the United States will shift this week towards the latest Fed meeting.
On the energy front, the Biden administration is reportedly open to easing sanctions on Venezuela in exchange for a ramp-up in oil exports. This came after the United States had banned imports of Russian oil. The White House defined that as a “significant action with widespread bipartisan support that will further deprive President Putin of the economic resources he uses to fund his needless war of choice.” The statement also said that the United States did not expect nor require European allies to take the same step and added that the United States was only in a position to do so because of its “strong domestic energy production and infrastructure.”
The White House announced that 90 million barrels would be released from the US Strategic Petroleum Reserve in order to keep energy prices down for Americans. Also, US Energy Secretary Jennifer Granholm told oil executives in Houston on Wednesday that the United States was now on a “war footing” and called on them to increase oil production immediately in a collective effort to avert a price spike.
The CNN Fear & Greed Index remains in “Extreme Fear” territory, indicating the extent of investor angst, but also the risk of a sharp move higher on any positive headlines.7
Last week was poor across Asia, with the MSCI Asia Pacific closing down 4.05%, dominated mainly by concerns over the Russia-Ukraine conflict and increasing COVID cases leading to restrictions across the region. We note that a new coronavirus variant that fuses elements of Delta & Omicron was identified last week. There were US threats of reprisals against Chinese firms found defying Russian sanctions and Norway’s sovereign wealth fund sold down some of its Chinese positions. In addition, surging commodity prices and worsening inflationary pressures are putting central banks in a situation of needing to tighten policy without choking growth. Risk of a consumer spending pullback amid escalating cost of living are driving concerns about stagflation as flattening yield curves and falling equity markets signal potential trouble for the global economy.
The markets got off to a poor start last week, with the prospect of a Russian oil embargo hitting risk assets especially and driving big gains in crude oil and metals prices.
Hong Kong’s equity market was the standout underperformer, closing the week down about 6%. Once again, COVID-19 is having a big impact as Hong Kong’s plan to test the entire population for coronavirus in March has been indefinitely postponed as the city prioritises vaccinating the elderly and reducing fatalities, according to Chief Executive Carrie Lam.
China’s mainland equities closed last week down 4%. On Monday, the government unveiled GDP growth of around 5.5% for 2022, above economist expectations. However, China reported the most new COVID-19 cases since the initial Wuhan outbreak and Premier Li reiterated the “Zero COVID” policy will stay but will be fine-tuned to minimise economic disruptions. China is increasingly seen as a part of the nexus with the United States threatening repercussions for Chinese companies defying export restrictions to Russia. Beijing appears to be standing with Russia amid reports it is weighing stakes in Russian commodity firms. China also warned the United States against forming a Pacific version of NATO, reiterating at the National People’s Congress that it remains committed to resolving the Taiwan question.
On Thursday of last week, South Korea’s presidential election saw opposition candidate Yoon from the People Power Party winning with the narrowest margin in history. Yoon is known for promoting more cooperation with US and sanctions against Russia and North Korea.
The Week Ahead
Events in Ukraine will continue to be a key driver for investor sentiment, with markets likely to see-saw on any meaningful news. Hopes for progress from talks seems to have faded after a burst of optimism on Wednesday saw markets squeeze higher. That said, it is a busy week for central banks too, with the Fed policy meeting on Wednesday and BoE on Thursday. The market is pricing a 25 bps interest-hike for both. Note the BoJ also meets on Friday.
Monday, 14 March
- US State employment
Tuesday, 15 March
- UK Claimant Count & ILO Unemployment Rate
- France CPI
- Eurozone Industrial Production
- US Core PPI
- RBA Meeting Minutes
- Chinese Industrial Production
Wednesday, 16 March
- Italy CPI
- US Import prices & retail sales
- Federal Open Market Committee meeting and statement
- Japanese IP
Thursday, 17 March
- Eurozone EU27 New Car Registrations
- Eurozone CPI
- UK Bank of England policy meeting
- US Jobless claims
- US Industrial & Manufacturing production
Friday, 18 March
- Eurozone Trade Balance
- BoJ Policy Meeting
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1. Indices are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or a guarantee of future results.
2. Sources: BofA Global Investment Strategy, EPFR.
3. Sources: Eurostat, Gov.UK.
4. Source: Food and Agriculture Organization of the United States, FAO Food Price Index. Data as of February 2022. Indices are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or guarantee of future results.
5. One basis point is equal to 0.01%.
6. There is no assurance any estimate, forecast or projection will be realised.
7. CNN’s Fear & Greed Index tracks seven indicators of investor sentiment. Indices are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges.