Clearly this has been a horrible start to the year and certainly before we write anything, first and foremost our hearts go out to all those in Ukraine.
In terms of a market overview, a great deal can happen in what is the shortest month of the year. We started looking at this a week ago, when we were going to be writing about Chinese New Year, dystopian Winter Olympics and Western leaders ‘jaw-jaw’ing’ with Putin over Ukraine, but so much has changed in the course of that time.
The month had started with two main concerns, the two ‘R’s’, Rates and Russia. Market participants treated it as a typical case of risk-on and risk-off, then Putin’s forces invaded Ukraine on 22 February and it went into fully risk-off mode. In this environment, markets initially held-up surprisingly well, then more severe sanctions kicked-in and Russian markets dropped like bricks.
Inflation remains very much a concern and has been, and will be, exacerbated given the additional pressures on energy and metals markets. We have seen new recent highs, with US inflation at 7.5%, its fastest annual rise in 40 years, while UK inflation stood at 5.5%, its highest in 30 years. The question everybody is asking is how temporary or permanent this is.
In this environment, the Fed still appears set for a March interest rate rise. This is where Fed officials agree, although they are less unified on the next steps and probably more so given given what’s been happening geopolitically. Compared to only a few days ago, the likelihood is for a more restrained tightening from both the Fed and ECB.
Across the world, equity markets closed the month down and on the face of it came out of the month largely unscathed, having fallen hard on Ukraine news, only to rebound hard the following day. This was partly driven by growth stocks as well as large commodity businesses.
The S&P500 was down 3.8%, Nasdaq down 3.4%, FTSE 100 down 1.0%, Dax down 6.5% and Nikkei down 0.7%. But it was the MOEX Russian Index that really suffered on the sanctions, down around 50% from its record highs before trading was suspended.
It has certainly not been plain sailing for stocks, with certain stocks and sectors struggling throughout the month. But there were large gains from commodity stocks as energy prices rose, although at the end of the month some of these gains were given back as organisations exited from their Russian exposures, including the likes of BP, Shell and Equinor.
In this uncertain world, the CBOE VIX climbed throughout the month, peaking on Ukraine news, when it averaged around 30, and even touching 37, compared to the longer-term average below 20.
In commodities, oil and natural gas prices soared, with Brent at one point above $105 a barrel and European gas prices up 50-60% in the last week of the month. It was the same in metals, with aluminium up over 17% on supply concerns and now up almost 60% year on year. Commodity prices jumped in corn, lumber…
Safe-haven currencies rose, with the CHF seeing its biggest gain against the euro since 2018. On initial sanctions, the rouble hardly moved, then with these announced it dropped 30% against other currencies as the Russian central bank reacted by more than doubling interest rates from 9.5% to 20%.
In crypto, Bitcoin came back at the end of the month, with sanctions driving up crypto currencies and closed up over 18%, whilst ether was up almost 10%.