The past month’s markets have almost entirely focused on Russia’s war on the Ukraine. For once, a new China lockdown and even the threat of aggressive rate hikes appeared to play second fiddle. The repercussions from the war have led most economists and commentators to offer the most pessimistic outlook on inflation for over 30 years, with double digit inflation looking set to be the norm. Even Brevan Howard thinks the macro environment is as complicated as it has been for 75 years.
In Europe, Christine Lagarde, ECB President, has said that the inflation outlook is “fluid” with “higher inflation this year” as energy costs, food prices and bottlenecks persist. This comes just six weeks after Lagarde said that “there are no signals that inflation will be persistently and significantly above our target.”
Fed lifted rates a quarter and has signalled six more, potentially larger ones, to come later this year.
Markets are currently pricing in four ECB quarter point rate hikes by March next year. In the US, the Fed lifted rates a quarter and has signalled six more, potentially larger ones, to come later this year. Likewise in the UK, rates rose to 0.75%, the third rise in only four months.
Throughout the month, the EU, UK and US upped the ante on Russian sanctions and on 15 March targeted luxury goods, steel and iron. Multiple companies have been named and shamed for conducting business in Russia, with Coco-Cola joining Starbucks and other major brands to suspend their activities, and it was only late in the month that McDonalds decided to temporarily close its 850 locations. There are still many continuing to operate in the country.
This situation is unparalleled in Europe for many years and yet the VIX towards the end of the month was back around 19…
Given the level of geopolitical uncertainty as markets increasingly bifurcate between the West and the Rest (who continue to trade with Russia), the impact of war, sanctions and monetary tightening, the lack of market volatility has been a surprise. What we are experiencing is unparalleled in Europe for many years and yet the VIX towards the end of the month was back around 19, which is close to its long-term average of 18, having hit 37 on 7 March.
In such an environment, global equity markets seesawed dependent on the risk on/ risk off mood, as markets followed the various developments in Ukraine, but ultimately most markets closed in positive territory for the month, with the S&P 500 and Nasdaq up around 3.5%, and FTSE 100 up 0.8%.
Early on it had looked very different with markets under pressure, then on 8 March stocks surged and oil sank by more than 8% (TTF fell by as much as a quarter) as EU policymakers sought to protect the bloc economies, then tanked mid-month as China announced new lockdowns that impacted tens of millions of people. During these periods, opportunistic investors bought the dips. Stocks then rallied particularly hard on 29 March as traders focused on Russian-Ukraine talks and the possibility – later downplayed by Western leaders – of reduced military operations near Kyiv.
US Treasuries had their worst quarter since 1973… The yield curve also flashed a ‘warning signal’
With heightened inflation and the threat of aggressive Fed tightening, US Treasuries had their worst quarter since 1973 - the Bank of America Treasuries Index lost 6%. The yield curve also flashed a ‘warning signal’ as it briefly ‘inverted as bond investors drove short term rates on the two-year higher than the 10 year, a possible sign that a recession could follow.
But most of the volatile market action was in the commodity space, which for a large part was a rising tide. At one point the Bloomberg Commodities Index saw its biggest rise since 1974 as everything across the commodity spectrum – energy, metals and softs – increased. WTI and Brent broke through $120 a barrel, as the UK and US banned Russian oil and gas imports, yet by the end of the month when talks started to look more hopeful and the US announced the ‘historic release’ of 1 million barrels of oil a day over at least six months, the price pared back down to around the $105 marker.
One of the many consequences to come out of Russia’s invasion is a reminder of the importance of energy security, with Germany reliant on Russia for 65% of all its gas imports. To wean itself off Russian gas and to not have to pay for gas in rubles, on 30 March Germany activated emergency measures to implement gas rationing, a move that immediately saw a 15% rise in European gas prices. In the UK, the government has even started to talk about reopening up the North Sea and “turbo-charging” investment in solar and wind power. To alleviate some of these energy pressures on Europe short-term, the US agreed to supply an additional 15 billion cubic tons of LNG to the continent throughout the remainder of the year.
Nickel, in particular, saw the biggest move in LME history, as shorts struggled to cover themselves…
But it was in metals where some of the biggest moves to took place. Nickel, in particular, saw the biggest move in LME history, as shorts struggled to cover themselves with speculators piling in on supply concerns, with Russia responsible for 13% of total mining capacity (source: Rystad Energy). Ultimately, the LME was forced to close Ring trading and cancelled 5,000 nickel trades. This moved badly riled the likes of AQR’s Cliff Asness who had significant positions, with threats of possible legal action.
Gold was at one point seen as a safe haven from war and inflation, spiking at $2,070, almost a record and close to pandemic numbers, yet by the end of the month it was back down to around $1,950.
…there is a very real concern about this year’s harvests, which is clearly feeding through to the inflation numbers and supply.
In softs, there is a very real concern about this year’s harvests, which is clearly feeding through to the inflation numbers and supply. The head of MHP, Ukraine’s leading food supplier, has said that the vital spring planting seasons is just not possible, a situation that will have enormous ramifications on global food prices, with Ukraine responsible for around a tenth of global wheat exports and 13% of corn.
This was the month when bitcoin returned to favour. Having erased its losses for the year, it once more rallied towards the $50,000 marker as crypto rallied in the second half of the month. But it wasn’t all plain sailing, with EU policymakers debating on how to deal with decentralised finance, causing some nervousness, and ultimately saying to any provisions restricting bitcoin. .
In such a volatile world it is perhaps not surprising that corporates are being cautious, with Bloomberg writing that European dealmakers have pulled back from approx. $300 billion mergers, acquisitions and listings, and a 74% fall in global equity listings and 28% in global corporate bond issuance.
In fact, looking at EY/ Dealogic quarterly data, there were 321 IPOs in the first quarter of this year, totalling $54.4 billion. This compares poorly with 512 during the same period last year, totalling $112 billion. The US saw a year-on-year decline of 72% in number of deals and fall in proceeds. EY puts this down to ‘the rise in geopolitical tensions… market volatility… overvalued stocks… impact of inflation… potential rate hikes… pandemic risk…’
As always, in any conflict it is the people who suffer and the Russian war on Ukraine is an appalling catastrophe. Poland alone has taken in almost 2.5 million of the 4 million refugees from Ukraine. There is a terrible, very real, humanitarian crisis unfolding before our eyes. The ramifications and how Europe copes remains to be seen. Our hearts and thoughts are very much with the people of Ukraine.