Q2 2022 Economic Commentary

Global Markets

It feels like we are at an inflection point for markets. Central banks are recognising the increasing threat of persistent high inflation and the ‘lower for longer’ attitude is being replaced by rising interest rates and the withdrawal of Quantitative Easing. In reaction and anticipation bond yields have risen and areas of the equity market have been re-priced and fallen precipitously.

The western world has overcome the worst of the pandemic and the need for extraordinary economic support has diminished. Russia’s invasion of Ukraine has threatened growth, but crucially boosted inflation. It appears increasingly clear that Russia is intending to annex parts of southern and eastern Ukraine as it did Crimea in 2014. Western governments are unlikely to be as passive this time around and the progression of this new Cold War remains uncertain. Short of regime change within Russia we expect it will be a protracted conflict.

Equity markets have been driven by the demand for oil and commodities pushing Oil & Gas and Miners higher and almost everything else lower. Bond markets have been volatile reflecting the central banks’ tug of war on inflation expectations. The sanctions on Russia have and will continue to disrupt international supply chains, just as they were recovering from the Covid-19 pandemic. Economists’ current forecasts are that the impact of the Russian-Ukraine war will lower overall world GDP by around 0.2% this year, but the impact on each region will vary. Globalisation has been such a deflationary force over the previous decade(s), it is hard to envisage that post Covid-19, and this conflict, that this deflationary force will be in place in the future. In fact, the direct opposite (re-shoring) is more likely, another medium-term inflationary factor due to increased costs.

Following a major Covid outbreak in China, authorities have enforced a prolonged lockdown in Shanghai and severe restrictions on movement in certain areas. Coupled with the ongoing real estate downturn it is having a material effect on China’s economy and market sentiment.