Please see Brooks Macdonald’s latest Weekly Market Commentary below:
Inflationary pressures clash with the risk of a Ukraine conflict, creating volatility in the bond market
Worsening geopolitical headlines late in the US trading session on Friday caused sentiment to plunge. Bond investors, in particular, were struggling to balance the US inflation/interest rate picture, which has driven yields higher, with the Ukraine crisis which could trigger a flight to quality. At the moment, the flight to quality trade is winning out with the US 10-year Treasury yield back to 1.9% after hitting 2% last week.
Late in the Friday trading session, the US warned of an imminent attack from Russia on Ukraine, with detailed invasion plans pointing to a military incursion starting on Wednesday. The immediate reaction to this news was a rapid fall in risk assets, a rally in government bond yields and a spike higher in the oil price. European equities are playing catch up this morning with European indices ranging from 2-3% down as risk appetite indiscriminately affects equity market sectors. Over the course of the weekend there was no further escalation however the market is now expecting an imminent breakout either to the upside or downside. With the US and NATO allies ready to deploy punitive sanctions, and the real human cost from a conflict, the stakes are undoubtedly high over the next week.
Central bankers fine tune their guidance with the major central bank meetings out of the way for February
Before the Ukraine headlines late on Friday, the main event of last week was the US Consumer Price Index release which showed a headline inflation rate of 7.5% year-on-year. Federal Reserve (Fed) speakers drove much of the market narrative pre and post the release, with President Bullard garnering particular attention for his discussion of the possibility of an inter meeting hike, which was later talked down by other governors. The European Central Bank (ECB) meanwhile tried to calm bond market nerves around an imminent tightening in Euro Area monetary policy, with President Lagarde keen to stress that the ECB had little appetite for a widening of peripheral European sovereign bond yields.
The minutes from the latest Federal Reserve meeting will be released this week and all eyes will be on a series of high profile central bank speakers
With the minutes from the Fed’s latest meeting being released and a series of high-profile central bankers speaking, this week will likely be dominated by central bank speak, particularly as the banks need to incorporate geopolitical risks into their forecasts and guidance.
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Andrew Lloyd DipPFS
15/02/2022