International Communique No. 325 – 15th of February 2022


The main equity indices made a rough landing following shock high-inflation data for January out of the US. This is compounded by a particularly poor consumer confidence indicator (Michigan consumer confidence at 61.7 versus 67 expected) and the dangling threat of an invasion in Ukraine. Elsewhere, the corporate earnings season has had its fair share of both good and bad, showing that the Omicron variant has not had the negative impact on the economy that was once expected.

The US consumer price index rose by 7.5% in January. Oil prices – at a seven-year high in the wake of rising tensions with Russia, which has massed its troops on Ukraine’s borders – have stoked fears that a behind-the-curve Fed will overreact in March with a sharp rate hike. Cold water was poured on hopes for a patient approach when James Bullard, the most hawkish member, said that a full 1% increase all at once was a possibility. These remarks sent the yield on 10-year Treasury bonds surging to 2%. Over in Europe, ECB boss Christine Lagarde warned that acting too hastily could unhinge the economic recovery, which calmed expectations of an EMU rate hike.

The next geopolitical move is to be awaited, after diplomatic efforts between Western leaders and the Kremlin have so far failed to produce a solution. This is reflected in a significant reduction in equity positions across all sectors and the upswing by safe havens such as gold and government bonds amid declines in long rates, the dollar and the yen. Palladium and wheat, of which Ukraine is a supplier on both counts, and oil and gas are all in demand. The spectre of war in Ukraine has sent banking stocks – which only recently had the wind in their sails thanks to solid quarterly results – heading firmly south. The risk of sanctions against Russia, which could include a ban on Swift payments (however unlikely that may be), is weighing on banks most exposed in terms of profits.

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