At the close of business last Friday, global equities were mixed with the Canadian market up marginally, the US markets down, European markets rallied while Asian markets declined on the week. The yield on the US 10-year note increased this past week to 1.998 from 1..738% a week ago. The price of a barrel of West Texas Intermediate crude oil declined marginally to $109.33 from $110.60 last week while volatility, as measured by the Cboe Volatility Index (VIX), declined to 30.75 from 31.98 a week ago.
The Russian invasion of Ukraine is top-of-mind for many investors. This does not mean that concerns over inflation and its consequences for monetary policy have vanished. The rising cost of living across the world has been a key headwind for financial markets over the past few months. Inflation could become an even larger hindrance in the event of a prolonged eastern European conflict. What we initially thought to be a transitory inflation problem has evolved into something that has been longer-lasting. Supply chain issues and low inventories have been tied to labour shortages and limited stock of various materials. The result has been a median global inflation rate of 5.1% which stands far above its 5-year average of 2.0%.
There doesn’t seem to be a silver bullet for managing the inflation risks. Most experts tell us to avoid bonds and to buy gold during problematic inflationary episodes. History suggests that it isn’t as clear-cut or as simple as that. Central bankers could deliver one potential catalyst for a meaningful equity market surge if they walk back some of the interest rate increases expected in 2022. Even with labour markets and high inflation, we note that back in 1998 when the world was watching the Russian debt default crisis, this is exactly what central banks did to turn markets around.
A Western phaseout of Russian energy imports is under way
This past week, as the Russian invasion of Ukraine continued, the United States, European Union, and United Kingdom took coordinated steps to rapidly phase out imports of Russian energy products. The US action was the most abrupt, with the banning of the import of Russian crude and other energy products. The EU announced plans to reduce Russian natural gas imports by two-thirds by the end of this year and to end its dependence completely on Russian sources of energy before 2030. The UK announced it will end Russian oil exports by the end of the year. The price of Brent crude oil reached $132 a barrel on the news before stabilising above $109.33. It began the year around $78 a barrel and was at around $94 on the eve of the invasion.
Companies continue to shutter Russian operations
What began with a pullout from Russia by several Western oil majors has expanded to include payment processors, technology companies, and even iconic food and beverage brands. For some, that may amount not only to lost revenues but to stranded assets. In order to preserve jobs, on Wednesday, the Russian government approved plans to explore nationalising the operations of companies leaving or suspending operations.
The TSX has also been under pressure but has seen support from the performance of its large energy sector. Strong energy prices have helped the Canadian dollar offset the recent strength in USD.
US ECONOMIC NEWS
The S&P 500 remains in a downtrend as the ongoing Russia-Ukraine conflict and surge in global commodity prices has weighed on investors’ risk appetite.
EUROPEAN ECONOMIC NEWS
The ECB announces it will wind down asset purchases early as inflation rises. Given the jump in market uncertainty after Russia began its invasion, it surprised investors on Thursday by the European Central Bank’s move to end its asset purchase program earlier than expected. The ECB’s Governing Council announced it will taper its bond purchases more rapidly beginning next month. The council said that the pace of any rate hikes would be gradual and highlighted its willingness considering the situation in Ukraine, to ensure smooth liquidity conditions and safeguard financial stability.
JAPAN, CHINA and EMERGING MARKETS ECONOMIC NEWS
US names five Chinese companies for potential delisting
On Thursday, the US Securities and Exchange Commission cited five Chinese technology companies for failing to meet audit requirements, leading to a sharp fall in many US-listed Chinese stocks. Up to 270 Chinese firms face eventual delisting unless US and Chinese authorities agree on allowing audits to be inspected.
NEW SECTION! BRAND NEWS
We launched our new name and branding in February and are very pleased with your reaction. These are volatile times, and it feels like our new brand promise – Here your dreams are safe™ – is so fitting.
Over the next many issues of this weekly blog, we will focus on some aspect of our brand message. We’d like to start things off by featuring our dear clients, Harold and Flo, and the video they kindly agreed to do for us. Click here to watch!Or paste this link into your browser: https://www.dreamharbour.ca/our-clients/