International Communique No. 328 – 9th of March 2022


Historically, geopolitical events have had a short-lived impact on financial markets. But this time round the pandemic had already limited production for companies and gummed up supply chains, leading to surging inflation.

Russian forces have continued invading Ukraine, leading to a further deterioration in financial conditions, which could in turn dampen consumer spending and global economic growth. In recent years, Europe increased the share of imports in its energy consumption to 60%. And it relies heavily on Russia, especially for gas, which accounts for one-third of its demand.

Recently, the equity markets were hit by sharp corrections on benchmark indices and an upswing in volatility. Banking stocks were slapped hardest, suffering from fears of repercussions from several Russian banks entering into insolvency following the sanctions on international payments. The automotive sector was also shunned by investors as it could be hurt by the shutdown of production units, the shortage of spare parts from Ukraine and Russia, and the increase in commodity prices.

The current circumstances got off to a very bad start, with asset prices reacting to rumours that the US and its European allies have agreed to a total ban on oil imports from Russia to round out their existing economic sanctions. Investors have piled into safe havens like gold, the Swiss franc and the dollar. Prices of Brent crude and key commodities are soaring again, although traders, shipowners, banks and insurers have already largely stopped buying from Russia, given the risks involved.

One might also wonder if the current oil shock and the geopolitical haze could coax the Fed into changing its monetary policy plans. In his half-yearly testimony before Congress last week, Chair Powell noted that the current conflict makes the situation more uncertain and complicated, but that fighting inflation remains a priority at the Fed. He estimated that the interest rate hike at the next Federal Open Market Committee (FOMC) meeting in mid-March could amount to a quarter-point. Given that the US job market is doing well, with new positions created still well above expectations in February, a half-point increase might be in the pipeline for later.

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