Russia-Ukraine Tensions Continue

At the close of business on Friday, global equities declined on the week as investors assessed the risk of conflict on the Ukrainian border. The yield on the US 10-year note edged higher this week, reaching 1.93% from 1.92% a week ago. The price of a barrel of West Texas Intermediate crude oil declined to $91.07 from $93.98 while volatility, as measured by the Cboe Volatility Index (VIX), rose to 27.75 from 27.6.

Macro News

RussiaUkraine tensions continue
NATO has accused Russia of increasing the number of troops it has amassed at the Ukrainian border on Wednesday, a day after Moscow claimed it had withdrawn some of its military units. The Kremlin said that Russia had always maintained that its troops would return to their bases after participating in military exercises. The drills, widely seen as a display of strength by Russia, come as over 100,000 soldiers, along with tanks, missiles, and even fresh blood supplies, have been moved to Russia’s border with Ukraine. Russia is demanding that Ukraine never be permitted to become a NATO member and has said it wants the organization to roll back its presence in Eastern Europe. US Secretary of State Antony Blinken called for a diplomatic solution to the crisis in an urgent appeal to Russia he made while addressing the United Nations Security Council on Thursday. There is guarded optimism that a meeting between Blinken and Russian Foreign Minister Sergey Lavrov next week may yield a solution to the standoff.

Most measures of breadth or momentum suggest that the equity market is already oversold. I believe the coming interest rate increases are fully priced into the market.  It’s really difficult to gauge an exact bottom in share prices. Since 2009, when the last major bottom occurred, we’ve seen two episodes. It was in 2011, and again in 2018, when prices fell by just over 20%, even as the economy continued to grow. The thing to keep in mind is that corrections without recession tend to be shallower and shorter than the typical recession-induced bear market. I think the latest bout of volatility hasn’t altered my view. In the early stages of a monetary transition like the one we’re currently in where central banks are raising interest rates, the market gets choppy, and sometimes we see pullbacks of 5% to 10%. At a time like this, they can be a bit larger. Ultimately, we still have a lot of earning support in the market. I think earnings per share could be up 10% to 15% this year.



The Trans Mountain pipeline announced a 70 percent increase in the projected price tag for completing the project. Our federal government said that no additional public money would be put toward the project. That statement is questionable, as it is the Canadian government that owns the pipeline. The Trans Mountain pipeline carries 300,000 barrels of oil per day, transporting oil from Alberta to the West Coast. Its expansion will essentially twin the existing pipeline, raising daily output to 890,000 barrels.



Earnings News

With about 84% of the constituents of the S&P 500 Index having reported for Q4 2021, blended earnings per share show that earnings growth is running at 31% while sales rose about 15.5% compared with the same quarter a year ago.

Fed grapples with rate hikes
The minutes of the recent US Federal Reserve meeting indicate that interest rate hikes are likely on the way soon and that the unwinding of its nearly $9 trillion balance sheet, which largely consists of bonds, could be aggressive.

In 2021, global semiconductor industry sales reached a record $555.9 billion, up 26.2% year on year, the US-based Semiconductor Industry Association said, as companies ramped up production to meet demand amid a worldwide chip shortage.



UK inflation at 30-year high
Inflation in the United Kingdom came in at an annual 5.5% in January, slightly ahead of forecasts, and remained at a new 30-year high. On a monthly basis, consumer prices contracted by 0.1%, slightly less than the reading expected by economists in a Reuters poll. The annual print was expected to remain at 5.4%. December’s 5.4% annual rise in consumer prices was the highest since 1992, and the Bank of England has imposed consecutive interest rate hikes for the first time since 2004 in a bid to contain runaway inflation. The BOE expects inflation to peak at 7.25% in April, having previously projected a 6% ceiling in its December report.



As noted in previous newsletters, we are bullish about the prospect of returns in emerging market equities. This past week, the United Arab Emirates signed a trade deal with India that is expected to boost bilateral trade to over $100 billion within the next five years.


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