Markets continue to be dominated by the terrible events unfolding in Ukraine. Global equities last week lost 1.5% in sterling terms with a wide dispersion in performance between markets. European equities fell as much as 10.5% while the UK was down 6.7% and the US and Asia were little changed. UK and European equities opened down a further 1-2% on Monday but at the time of writing are currently flat on the day.
These declines have come in response to the stepping up of Western sanctions against Russia. It has now been partially barred from SWIFT (the international payments system) and its foreign exchange reserves have been frozen. Numerous companies have announced the closure of their Russian operations and importantly there is now discussion of banning imports of Russian oil.
Safe-haven assets have benefited from the risk-off move. 10-year government bond yields have fallen back 0.25-0.3% and unwound a fair part of their sharp rise over the previous couple of months. Meanwhile, the gold price is now in spitting distance of $2000/oz and the dollar has resumed its upward trend.
However, commodities have been the biggest beneficiaries. The Brent oil price has jumped to a 13-year high of $120-130/bbl and could well rise significantly more if the ban on Russian oil were to go ahead. Increased output from other OPEC members, US shale producers and also possibly Iran (if the nuclear deal is resurrected) will struggle to make up the shortfall.
While the jump in oil is most significant, other industrial and agricultural commodity prices have also increased sharply. All this will exacerbate the current surge in inflation and delay its eventual decline. While the core inflation rate (which excludes food and energy prices and is the primary focus for central banks) should be impacted much less than the headline rate, these price gains will inevitably fuel worries of a wage-price spiral.
Monetary tightening plans are as a result unlikely to be scaled back much. The war in Ukraine will undoubtedly slow global growth by exacerbating the cost-of-living squeeze, hitting confidence and disrupting supplies. But it still looks unlikely to de-rail the recovery altogether.
Indeed, the February employment data showed the US economy to be in rude health. Fed Chair Powell last week all but confirmed that US rates will be raised by 0.25% later this month, and further hikes are still very much on the cards over the remainder of the year. The Bank of England is also likely to proceed with a further 0.25% rise next week.
There is no denying that the growth/inflation mix has deteriorated as a result of recent developments. All the same, assuming events in Ukraine do not spiral completely out of control, prospects continue to look considerably more attractive over the medium term for equities than for fixed income.
Chief Investment Officer