International Communique No. 326 – 24th of February 2022


The tensions boiling over on the Ukrainian border as Russia moved its pieces into place spooked many to act cautiously. Principal equity markets ended in the red, bringing down the curtain on a week in which indices changed direction several times, in tandem with news headlines. Cyclicals, tech and financials staged the sharpest corrections, while traditionally defensive consumer stocks held up.

In the short term, financial markets are dancing to the tune of the news flow from Russia and the Ukraine. The prospect of a summit between Joe Biden and Vladimir Putin let off some of the pressure on equities. Demand for haven assets has also somewhat eased. Gold has edged down below USD 1,900 per ounce while bond yields have ticked upwards. The price of crude oil is also falling.

A volatile week is to be expected, dominated by news from the Russian-Ukrainian border. Understandably, macroeconomic issues have taken a back seat for the time being. In this context, the continued preference for blue chips and retain an underweight in bonds is understandable.

Aside for the geopolitical crisis, the focus for the coming weeks will remain firmly on inflation and the next Federal Open Market Committee (FOMC) meeting in March, when the first rate increase is set to take place. This prospect has also led bond yields higher in Europe. In Switzerland, the 10-year government is now yielding 0.21%. What causes the most worry and impact on appetite for risk-taking is mainly the manner and speed of developments. The Fed is due to tighten policy on the basis of its macroeconomic analysis. James Bullard, president of the St Louis Fed, even expects 100bp of rate hikes by July; although he is also the most hawkish FOMC member. The shrinking of the balance sheet, which has more than doubled since the onset of the pandemic, is expected to begin mid-year. This process will start by the Fed not reinvesting funds flowing inwards from maturing assets over the next two years, starting in June, amounting to almost USD 1,800 billion.

US retail sales rose by 3.8% in January, shooting past expectations. Excluding transport, the increase was 3.3%. Even adjusted for inflation, growth is strong. Retail sales are already 10% above their pre-pandemic benchmark, proving that fears of an economic slowdown are at this stage unfounded.

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