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Market Update: War and Inflation Impact Markets Posted on March 25, 2022

Volatile commodities | Turmoil takes toll | Gold back in vogue

Article by MFS

For the week ending 25 March 2022

As of noon on Friday, global equities struggled to advance on the week, marking consecutive weekly gains for the first time in 2022. The price of a barrel of West Texas Intermediate crude oil rose to $113.47 from $104.69 last Friday. The yield on the US 10-year note rose to 2.48%, its highest level since May 2019, following US Federal Reserve Chairman Jerome Powell’s remarks on inflation. Volatility, as measured by the Cboe Volatility Index (VIX), fell to 22.3 from 24.1 a week ago.

Macro News

Fed chair addresses inflation 

Fed Chair Jerome Powell this week vowed tough action on inflation, which he said jeopardizes an otherwise strong economic recovery. On Monday Powell echoed a Federal Open Market Committee post-meeting statement, reiterating that interest rate hikes would continue until inflation is under control. If necessary, he said, the increases could be even higher than the quarter-percentage-point move approved at the meeting. Powell also addressed the Russian invasion of Ukraine, saying it is adding to supply chain and inflation pressures. Under normal circumstances, the Fed would generally look through those types of events and not alter policy, he said, but with the outcome unclear, policymakers must stay on the alert.

UK inflation continues to surge

Hitting its highest level since March 1992, UK inflation in February surged to an annual rate of 6.2%, above the 5.9% annual expansion expected by economists polled by Refinitiv. As it looks to contain inflation without snuffing out economic growth, the Bank of England has hiked interest rates at three consecutive monetary policy meetings, raising the cost of borrowing from its historic low of 0.1% to 0.75%. The central bank’s Monetary Policy Committee communicated a more dovish tone than expected last week, highlighting the squeeze on household incomes amid a sharp rise in commodity prices following Russia’s invasion of Ukraine. Policymakers now expect inflation to peak at 8% in the second quarter of 2022. UK Finance Minister Rishi Sunak on Wednesday announced an immediate cut to fuel taxes in a bid to mitigate the historic hit to living standards in the United Kingdom.

COVID subvariant cases surging

While war rages in Ukraine, little attention is being paid to surging COVID-19 cases across Europe that are also starting to filter out to the rest of the world. The rise in cases across the continent, from the UK and France to Italy and Austria, is being driven by several factors: The lifting of most restrictions, waning immunity from vaccines and booster shots and the spread of the new, highly transmissible omicron subvariant BA.2. Germany is seeing a surge in cases and has reported daily tallies of new infections of between 200,000 to 300,000 a day in the past week. Case counts of the BA.2 subvariant have more than doubled over the past two weeks and now represent more than 34% of COVID-19 infections in the US, according to data published by the Centers for Disease Control and Prevention. Mainland China has reported well over 1,000 new confirmed COVID cases a day since March 12, with the number holding above 2,000 for the last three days, not including asymptomatic cases.

Russia-Ukraine News

War developments, casualties and reactions

Ukraine’s President Volodymyr Zelenskyy called for more pressure on Russia as the war in Ukraine appeared to be entering a stalemate after a month of conflict. The British government said Ukrainian forces are carrying out successful counterattacks against Russian units on the outskirts of Kyiv and may be regaining lost ground. NATO estimates that up to 40,000 Russian troops have been killed, injured, captured or have gone missing during the first month of the Kremlin’s war, an alliance official confirmed to NBC News. The United States plans to sanction approximately 400 Russian individuals and entities, including members of the elite and more than 300 lawmakers in Russia’s lower house of parliament, the Duma, a senior official of the administration of President Joe Biden said Thursday. Also Thursday, Biden said NATO would respond in kind if Russia used weapons of mass destruction in Ukraine. He also said he would support an effort to expel Russia from the G-20 group of economies. NATO has agreed to strengthen its defenses in Europe in the face of Russia’s continuing aggression.

Russian official reportedly steps down

A veteran, high-ranking aide of Russian President Vladimir Putin has reportedly quit as Moscow’s climate envoy due to his opposition to Russia’s invasion of Ukraine. Anatoly Chubais reportedly stepped down and left the country, citing his opposition, two people familiar with the situation told Bloomberg on Wednesday. If the report is confirmed, it will mean Chubais is the highest-ranking individual to publicly break with Putin’s regime, with almost all Russian officials and state media maintaining a wall of silence when it comes to criticizing the president or his invasion.

China backs Russia’s G-20 membership

China has reportedly taken Russia’s side amid speculation that the US and international allies could seek to expel the country from the G-20 group of the world’s largest economies over its invasion of Ukraine. The likelihood that any bid to exclude Russia outright would be vetoed by others in the group — which includes China, India, Saudi Arabia and others — raised the prospect of some countries skipping G-20 meetings this year, sources told Reuters. Russia was suspended from what was previously the G-8 after it annexed Ukraine’s Crimean Peninsula in 2014.

Fertilizer prices at record highs

Supply shortages fueled by the Ukraine-Russia conflict, along with a host of preexisting factors, have driven fertilizer prices to record highs. Prices for the raw materials used to make the fertilizers — ammonia, nitrogen, nitrates, phosphates, potash and sulphates — are up 30% since the beginning of the  new year and now exceed those seen during the food and energy crisis in 2008, according to British commodity consultancy CRU. In 2021, Russia was the world’s top exporter of nitrogen fertilizers and the second-largest supplier of both potassic and phosphorous fertilizers, according to the UN Food and Agriculture Organization. Separately, the Moscow Exchange resumed trading on Thursday. Short selling will be banned, and foreign investors will not be able to sell stocks or OFZ ruble bonds until 1 April.

Quick Hits

The US Securities and Exchange Commission on Monday debuted expansive rules that are aimed at protecting investors by requiring publicly traded companies to disclose how climate risks affect their business, outline their own greenhouse gas emissions and report on climate-related targets and goals.

The US said Friday it will work with international partners to provide at least 15 billion cubic meters more of liquified natural gas (LNG) to Europe this year, seeking to end the bloc’s dependence on Russian energy exports following the Kremlin’s invasion of Ukraine. The additional volumes of LNG are expected to increase going forward, the White House said in a statement.

Cryptocurrency companies could be forced to wind down their business in the UK if they fail to register with the finance watchdog ahead of a key deadline next week. From 31 March, firms operating crypto services in Britain must be registered with the Financial Conduct Authority, which is tasked with overseeing how digital asset firms combat money laundering.

Total mortgage application volume in the US fell 8.1% last week compared with the previous week, according to the Mortgage Bankers Association’s seasonally adjusted index.

A group of Chinese real estate developers said this week that they are either not able to release their financial results on time or have yet to set board meetings to discuss them.

Pending home sales, which measure signed contracts on existing homes, fell 4.1% in February compared with January, according to the National Association of Realtors. Sales were down 5.4% compared with February 2021. Analysts were expecting a slight gain. This is the fourth straight month of declines in pending sales, which are an indicator of future closings, one to two months out.

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