Market Observations – May 2022

Global Markets

Russia’s invasion of Ukraine shocked global markets and has the potential to fundamentally change the global political and economic landscape. Initially many analysts assumed that Russia would quickly take hold of parts of Ukraine (perhaps all) but this has not been the case.

Ukraine’s formidable resistance has slowed Russia’s progress and has allowed the West to aid Ukraine and impose punitive financial sanctions on Russia, its hierarchy, companies, and people. Whilst there is welcome talk of retreat and peace, it is unclear what the true intentions of Putin’s Russia are, and caveats should be placed on these aspirations.

The immediate consequences of the war and sanctions for financial markets are a little clearer, at least in the short term, the second and third order effects less so. Firstly, it is clear that the conflict is an inflationary event. Energy markets across the globe have re-priced, with WTI and Brent Crude oil trading above $100 a barrel and the prices in the wider commodity complex (Natural gas, Wheat, Corn, Coal, Copper, Gold etc) spiking to new highs.

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 Russian Rouble initially fell 30% against the US Dollar to an all-time low but has since recovered to near pre-invasion levels assisted in part by the Russian central bank’s decision to double interest rates to 20%. 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.

Chris Davis
Chief Investment Officer