Market Pulse

Market Pulse

February 22, 2022

In focus

Last week, global markets endured a choppy, risk-off tone as tensions ratcheted up along the Russia-Ukraine border and global security advisers warned of a growing threat to stability. On Sunday, Russia entered two pro-Russia regions (Donetsk and Luhansk) in Eastern Ukraine, claiming the move necessary for “peacekeeping” efforts. Thus far, U.S. and European sanctions have been somewhat limited; however, both are threatening more to come, especially if Russian forces advance further into Ukraine.

At this stage, the impact of the Russia-Ukraine situation on the global economy appears limited. Stricter, more broad-based economic sanctions would likely increase the fallout. Although European countries have reduced ties with Moscow over the past decade, several major European economies remain meaningful trade partners with Russia. Therefore, countries like Germany, the Netherlands, and Italy are most exposed to tighter restrictions, but that exposure is manageable at this stage.

The bigger economic wild card is in the form of energy prices, particularly oil and natural gas. Given Russia’s sizeable role in commodity markets –particularly for Europe –further escalation could force oil prices above the $100 per barrel mark for the first time since 2014. That would add to the mounting inflationary pressures that have global central banks on edge to tighten monetary policy. But, this scenario is predicated on two key unknowns: 1) the extent to which Russia-Ukraine tensions escalate, and 2) central banks’ willingness to look through an oil supply disruption as yet another inflationary pressure that will ultimately subside. These questions leave risk that markets will watch intently.

A look back

  • Rising geopolitical tensions fueled elevated volatility and a risk-off tone in global equities. The MSCI ACWI Index declined -1.7% last week, with the S&P 500 index posting a similar -1.6% drop.

  • The slope of the U.S. yield curve held relatively steady last week as rising tensions along the Ukrainian border offset the effects of strong U.S. economic data. 10-year yields ended the week trading at 1.94%.

  • The release of the January FOMC meeting minutes did not tee up a 50 basis point hike in March, but did support flexibility to respond to future data shocks.

A look ahead

  • The world will monitor Russia’s next steps after entering pro-Russian areas of Eastern Ukraine on Sunday. The escalation creates a challenge for global monetary policymakers, given its potential effects on energy prices and global sentiment.

  • The impressive U.S. Q4 earnings season enters its home stretch, led by major retailers (M, HD, LOW), plus ABI, BABA, DELL, EBAY, RY.

  • Economic releases: 4Q GDP, Personal Consumption Expenditures, Durable Goods Orders, Markit Manufacturing & Services, Personal Income.

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