Take Five: addressing the crisis in Ukraine | Investment news

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The war in Ukraine, and its fallout, remain central to the markets.

How much more pain is the Russian economy about to hit? Can oil rise even higher? US inflation data is available Thursday, the same day the European Central Bank holds a crucial policy meeting.

Here’s your week ahead in markets from Kevin Buckland in Tokyo, Ira Iosebashvili in New York, Tommy Wilkes, Julien Ponthus and Dhara Ranasinghe in London.

After a flurry of Western sanctions, the Russian economy will see a sharp economic contraction and a rise in inflation. The risks of debt default are on the rise.

Aside from the ruble, which hit historic lows, most Russian markets have been closed since the West imposed tougher sanctions following the Russian invasion of Ukraine.

Foreign investors are rushing to withdraw money from Russia if they can. They found their assets frozen as sanctions, restrictions imposed by Russia and a lack of liquidity make exit impossible.

It was also difficult to calculate the full extent of the damage. Wealth managers are hoping for greater clarity about how little their Russian investments are worth, if nothing else.

Many will also prepare for Western sanctions to go even further and target the Russian energy industry. Expect more jaw-dropping movements in the ruble and oil prices if they do.

US Dollar vs Russian Ruble https://fingfx.thomsonmigration.com/gfx/mkt/jnpwebjnbpw/rouble.PNG

Expect Thursday’s data to show that US inflation rose again in February, confirming what we all already know: The Federal Reserve is likely to hike rates in March.

Economists forecast headline inflation of 7.8% year-on-year, surpassing January’s record of 7.5%, the highest for the past four decades.

The war in Ukraine has mitigated expectations of aggressive Fed rate hikes, but stronger-than-expected inflation could rekindle the chances of a more aggressive stance. This would damage risk assets, which are already upset by the uncertainty linked to Ukraine.

The Fed says it focuses on containing price pressures. Its credibility could be at risk if inflation were to worsen, eroding household spending power and distorting investment and spending decisions. The University of Michigan Consumer Sentiment Index on Friday could provide an idea of ​​how consumers are doing.

CPI https://fingfx.thomsonmigration.com/gfx/mkt/egpbkqjakvq/Pasted%20image%201646259171522.png

Before Russia invaded Ukraine, the European Central Bank’s March 10 meeting was supposed to hasten its exit from ultra-easy policies. Record inflation of 5.8%, more than double the 2% target, reinforces this thesis.

Here is the problem. The war, triggering a new surge in energy prices, is causing upward pressure on inflation. At the same time it damages consumption and economic growth.

The ECB’s plans are in turmoil and Thursday’s big decisions seem unlikely. President Christine Lagarde may be pressured into expecting a rate hike after she gave up on her promise not to hike rates this year last month.

This was before war broke out in Europe, leaving the ECB between a tough and tough place.

Money Markets Dim Bets on ECB Rate Hike https://graphics.migration.com/EUROPE-MARKETS/gdpzybkonvw/chart.png

The Russian invasion is a triple setback for eurozone banks, with no immediate solution on the horizon. Western sanctions on Russia have hit banks exposed to that country’s companies or hold assets there. The question arises whether multinational groups such as Austria’s Raiffeisen or France’s SocGen will divest or be deprived of their units in the country, and at what cost? Second, the ECB’s expectations of the rate hike, which the banks were benefiting from, were drastically revised downwards. Finally, bank stocks are cyclical stocks that investors tend to dump first when the macroeconomic environment worsens.

The sector lost over a quarter of its market value in about three weeks. While next week will bring stability, this is a bitter pill for investors who had bought what was the consensual buying trade entering 2022.

Banks https://fingfx.thomsonmigration.com/gfx/mkt/dwvkrlkmrpm/Pasted%20image%201646310865293.png

5 / IT IS THE ECONOMY, COMPANION And in China it is the National People’s Assembly that monopolizes the headlines. The annual session of the Chinese parliament of the rubber stamp runs from Saturday for about a week, setting the main economic and political goals for the year. The key word is stability. Beijing is keen to get its slowing economy back on track by heading towards an even more important event later this year: the Party Congress twice a decade in which President Xi Jinping is almost certain to secure an unprecedented third term. as a leader. This means increased fiscal stimulus, more tax cuts and an ongoing monetary policy, while any painful reform plans – such as a long-awaited “prosperity tax” – are pushed into the background.

Don’t expect comments on Ukraine either: China has not condemned Russia’s attack and claims Western sanctions against Russia are unfair.

China aims for growth https://fingfx.thomsonmigration.com/gfx/mkt/xmvjoebqlpr/Pasted%20image%201646293762459.png

(Compiled by Dhara Ranasinghe; Editing by Christian Schmollinger)

Copyright 2022 Thomson Reuters.

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