Please see Brooks Macdonald’s Weekly Market Commentary below published yesterday (21st February 2022):
Geopolitical risk continues to dominate the near-term investor narrative with the US describing a Russian invasion of Ukraine as imminent.
Equity market volatility continued on Friday as Ukraine risks ratcheted up and geopolitical uncertainty looks set to continue well into this week. Markets are fixated on the geopolitical risk within Ukraine, particularly as it could have, alongside severe human cost, a significant impact on inflationary pressures in continental Europe and the rest of the world. The imminence of US warnings over a Russian invasion of Ukraine gathered pace over the weekend with President Biden saying that significant volumes of intelligence pointed to the invasion starting in a matter of days.
The US and Russia are set to commence high level talks this week after a more constructive call between President Putin and President Macron.
A phone call yesterday between President Macron and President Putin sounded constructive, with both parties agreeing that a diplomatic solution to tensions in Ukraine was preferable. That said, the last set of calls between France and Russia established a Russian commitment to withdraw troops after the ongoing exercises in Belarus which appears to have now been reversed. The US and Russia have in principle agreed to a summit between the leaders but the US has said that such a summit would be conditional on Russia not invading Ukraine in the interim. The content for discussion at the summit will be set between the US secretary of state and Russia’s foreign minister on Thursday, with the implication that the high-level talks will talk place on Friday at the earliest. This likely sets the stage for another week of uncertainty as energy markets attempt to price in a binary outcome.
This week sees the publication of the Federal Reserve’s preferred measure of inflation as well as surveys testing the health of US consumption.
Meanwhile financial markets are also trying to assess the strength of the US economy and whether momentum is sufficiently strong to offset the demand destruction that would be caused by an aggressive tightening of US monetary policy. This week we have the US’s preferred inflation measure, Personal Consumption Expenditures (PCE), released on Friday which will add to the debate over whether the Federal Reserve will raise by 25 or 50bps in March. However, we will be paying as much attention to durable goods orders for a view of current demand for capital outlays and to consumer confidence and sentiment numbers that will help explain the consumer reaction to the inflation pressures of recent months.
Adding Ukraine tensions to a market outlook, which is already wrestling with several inflation and interest rate narratives, sets up a volatile backdrop. This week will give investors a preview of consumer demand in the US which will be an essential consideration for how the economy will react to a more aggressive Federal Reserve hiking cycle. The bond market is currently implying six rate hikes in 2022 – whether that has a major impact on GDP will be highly dependent on US consumption.
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Andrew Lloyd DipPFS
22/02/2022