The statements are quite decisive and the clashes with Russian separatists in eastern Ukraine are considered a “foreplay”, but all the cards are still in the hands of one person – President Putin.
Ronen Menachem – Chief Economist, Mizrahi Bank
20/02/22 11:06
4 comments
Global stock markets will be traded this week as a sign of tremendous alertness ahead of Russia’s invasion of Ukraine – which Western leaders say could take off at any moment and encompass a number of fronts. The end of the Winter Olympics in Beijing lowers another “stop” before a Russian move.
The statements are quite decisive and the clashes with Russian separatists in eastern Ukraine are considered a “foreplay”, but all the cards are still in the hands of one person – President Putin.
Thus, market volatility is so high and any utterance, or meeting between Western leaders and Russian leaders (planned for at least two of these this week) can shuffle the cards.
Some of the declines so far have already been priced in an invasion scenario, but if and as it goes ahead, the developments that will follow will determine whether the declines will continue, or be halted.
However, alongside the security escalation, which is making the most headlines, the markets are also responding to the rise in global inflation, of course with an emphasis on the US, where it is much higher and more horizontal than in Europe.
These two factors – the security escalation and the rise in inflation – which may accelerate the rise in interest rates and their intensity, – work against the stock markets abroad. In addition, since the reporting season is coming to an end, More.
As for the bond markets – the two factors will work in the opposite direction.
The fear of more frequent and restrained interest rate hikes is, of course, driving up revenue to maturity yields, but it seems that the 10-year increase in revenue yields on treasury already embodies the more common recent scenarios, which include 4 to 5 interest rate hikes over the coming year.
There are also scenarios that include a higher number of raises, but in my estimation these are still end scenarios.
The fear of interest rate hikes is now over-expressed in the shares of growth companies and in the technology sector.
On the other hand, the fear of a major war in Europe causes a real decline in investors’ risk appetite. As a result, during such periods, demand for insured foreign assets increases, which works in favor of U.S. government bonds (and the dollar needed to purchase them) and a decrease in yields on them.
Thus, in terms of the bond market, the future intentions of Putin, on the one hand, and Fed Chairman Jerome Powell and his colleagues, on the other hand, offset each other, with the offset being felt mostly among the longer bonds. That will advance more on the agenda – the military confrontation or statements and actions of the Fed.
It should be noted, however, that one of the consequences of a possible confrontation – and consequent economic sanctions to be imposed on Russia – from the world’s largest producers of crude oil and natural gas – may be a shortage of energy inputs, especially when OPEC countries find it difficult to reach their own quotas.
Demand for heating and heating in Europe is very high in the face of the cold and stormy winter (the storm that hit the continent over the weekend is clear evidence of this) so the shortage may be more acute and fuel prices will skyrocket – which will accelerate price pressures and add to inflation. On the other hand, reports of rapprochement in the nuclear talks between Iran and the US-led powers – as they mature and return Iran to the oil market – may offset some of the implications for rising prices.
In addition, since the latest indications of the economic activity of most currency blocs point to a shuffle, or even a slowdown, the rise in inflation may be accompanied by an economic slowdown.
On Monday, the US stock market will be closed on the occasion of Presidents’ Day – an interesting fact given the situation in which Presidents – Putin on the one hand and Biden on the other, determined at the end of the day whether the continent of Europe calmed down or clashed. Other events.
Naturally – the picture I have described is very challenging for the global economy and the global capital markets, due to a combination of economic challenges along with military-political challenges. This state of affairs will cloud investor sentiment and it is very likely that their approach will be very defensive until things become clear on both fronts – which can take a long time.
The wild card today is how China will react, which is facing a difficult conflict with the United States and has sided with Russia.
However, this is also a situation That all parties involved have a lot to lose – and above all Russia, whose economy is subject to severe difficulties and sanctions that will be imposed on it, as the United States promises, will make it even more difficult.
Therefore, there is still a reasonable chance of a compromise – which will give markets a boost going forward – at least in the short term.