Financial market attention is on the conflict in Ukraine and acknowledging the tragic human consequences here, we will focus on the financial implications. Inevitably this post could be out-of-date in a couple of weeks. Obviously, the Western World has imposed multiple sanctions on Russia and financial markets have fallen globally with the exception of commodities e.g., gold, oil, wheat with the last two being particularly strong – Brent Oil trading at multi-year highs at $118 per barrel – Gold trading at $1920 per ounce but this still well below its Covid $2,050 high.
At the moment European stock markets are falling harder than US. Looking at last week the S&P was only down 1% overall, the NASDAQ 1.7%, whilst most European markets (given the greater geographical exposure to the region) were down in the region of 4-5%.
What are the immediate considerations by region?
US
The US is experiencing a strong post-Covid economic rebound.
The American economy added 678K jobs in February of 2022, the most in seven months and way above market forecasts of 400K. (This after a strong January report of +467,000). That leaves employment 2.1 million jobs below its pre-pandemic level and many economists believe the job market could recover all the pandemic losses this year. Fed Chair Jay Powell recently said to Congress the labour market was “extremely tight”. February’s inflation was running at a ‘red hot’ 7.5% annual rate, well above the Fed’s target of 2%, and the highest since 1982.Whereas initially the Fed was relatively unconcerned about this, putting the rise down to post-Covid supply problems – the concern increased as 2022 unfolded.
Consequently, with very strong inflation and strong employment, prior to events in Ukraine, the Fed was under enormous pressure to raise interest rates from the current 0.00-0.25% Fed Funds range and the Fed publicly announced interest rate rises were coming. Indeed, the market was predicting six 0.25% Fed Funds rate rises this year.
February’s inflation data (CPI – Consumer Price Index) is due out March 10th and is expected to have accelerated further – at a 7.9% annual rate – led by higher energy costs. The rising cost of heating oil and petrol, which has been exacerbated by the conflict in Ukraine, is expected to have driven energy prices up by 4.7%.
Rents are also expected to increase but the rise in food prices is expected to have slowed, but could pick up again as people return to restaurants after the Omicron wave. The inflation report is expected to show that some consumer prices have moderated – most notably new and used cars.
Will the Ukraine crisis alter the ECB’s monetary stance?
Christian Lagarde, the president of the European Central Bank, will have her first chance to outline how seriously Russia’s invasion of Ukraine has upended the outlook for the eurozone economy when she presents new forecasts on Thursday.
The ECB, perhaps in contrast to the US Federal reserve, is widely expected to postpone any major policy decisions when its governing council meets in Frankfurt this week, preferring to maintain as much flexibility as possible while assessing the economic fallout from the war in Ukraine.
The crisis creates a dilemma for the ECB. While on the one hand economists have slashed growth forecasts for the euro area this year and expect the ECB to do the same, the disruption to the supply of energy and other commodities is expected to drive up inflation – we could be entering a world of Stagflation.
Inflation, is also strong in the Eurozone, rising at its fastest pace in the 22-year history of the single currency – jumping 5.8% in the year to February – and most economists expect it to remain well above the ECB’s 2 per cent target at least for the rest of this year.
Perhaps Legarde will take a neutral stance on the potential of the ECB raising rates this year, neither signalling it is likely nor ruling it out.
Indeed, some Economist don’t expect the ECB to move to an ‘outright dovish’ position and predicted it would keep its inflation forecast for the next two years slightly below its 2 per cent target, allowing the central bank to maintain its generous stimulus for at least a few more months.
Which companies are exposed to the fallout of the war in Ukraine?
European banks, brewers and car manufacturers with exposure to Russia and Ukraine are amongst the companies to have tumbled in value since Moscow’s invasion.
Shares in Renault, which owns Russia’s biggest car company, Avtovaz, have dropped by more than a quarter since the close of trade on February 23.
The Austrian bank Raiffeisen, whose Russian business has EUR 22.9 billion of assets – has shed more than two-fifths of its market value over the same period. France’s Société Générale, another bank with substantial operations, in Russia, has fallen by a third.
In the brewing sector, Denmark’s Carlsberg, which last week halted production at its three Ukrainian breweries and whose Baltika brand accounts for roughly a quarter of Russia’s beer market, has slumped 15.5%.
Declines have also extended to the energy sector. Shares of the Finnish state-owned group Fortum – said it would stop all new projects in Russia – have fallen by more than a quarter.
European equities have dropped broadly in recent days, and more than US shares, but their declines have not proved severe with a MSCI gauge tracking European stocks, priced in dollars, down by a tenth since February 23.
No doubt financial markets are faced with a period of uncertainty and volatility. In such an environment, new issuance of shares and bonds will be extremely difficult.
Beyond financial considerations, we send our thoughts and prayers to the people of Ukraine.
