Global Equities and Bond Yields Rise, Economic Indicators May Show Damage from Ukraine Conflict
Last Week Review
Investor sentiment struck a positive tone last week with global equities rallying 5.8% and credit spreads tightening. U.S. equities led the charge (+6.3%), followed by developed ex-U.S. equities (+5.1%) and emerging market equities (+3.4%). China’s equity volatility contributed to a 5.1% drop in emerging market equities through last Tuesday before bouncing back. The Federal Reserve’s first interest rate hike since 2018 and heightened inflation risks resulted in the two-year Treasury yield rising 0.19% to 1.94% and the 10-year yield increasing 0.16% to 2.15%. The 10-year German Bund yield also rose, up 0.12% to 0.37%.
Russia-Ukraine Conflict Eludes Peaceful Resolution
NATO spillover risk was elevated early last week following Russian missile attacks near Poland’s border, however that risk subsided as the week advanced. Comments from Ukrainian and Russian officials suggested progress on a peace agreement. However, those comments were later contradicted by statements from leaders on both sides as well as continued attacks around major population centers in Ukraine. While hints of optimism on a peace agreement contributed to somewhat more positive risk sentiment, most investors do not expect a near-term peaceful resolution. As the war prolongs, the odds of a decisive victory by either side are shrinking. For now, the situation remains fluid with elevated uncertainty.
Federal Reserve Initiates Liftoff
The Federal Reserve delivered its first rate hike since 2018, of 0.25%. The dot plot of Fed members’ projections of the policy rate was slightly more hawkish than expected. The median projection for the 2022 Fed funds rate was revised up to 1.9% from 0.9% and the 2023 projection was revised up to 2.8% from 1.6%. Economic growth forecasts were revised lower and inflation forecasts revised up, but in the post-meeting press conference Chairman Jerome Powell struck a positive tone on future economic growth. Initially, Treasury yields rose and equities declined, but later in the day Treasuries pared some of the losses and equities turned positive. The Bank of England also raised its policy rate 0.25%. That said, the central bank communicated a cautious approach to future policy given Russia-Ukraine uncertainty.
Volatility Hits China’s Equity Markets
A COVID-19 outbreak led to lockdowns across major China cities per the nation’s zero-COVID policy. Political risk also weighed on investing sentiment after Russia asked China for military supplies. China denied it, but news of the move nonetheless put the spotlight on China’s key role in the conflict. When U.S. President Joe Biden and Chinese President Xi Jinping met toward the end of last week, Biden warned of consequences if China supports Russia’s invasion. Further, the potential for U.S. de-listings of China stocks also weighed on China equities. After steep declines, equity markets bounced back when China authorities pledged capital market support.
This Week Preview
Biden to Attend NATO Summit
We think Russia has shown few signs of slowing its invasion and is likely to escalate conflict until it can claim some sort of win. Despite last week’s somewhat positive signals on a diplomatic resolution, Russian President Vladimir Putin has not shown a willingness to compromise. On Thursday, Biden will attend a NATO summit to discuss what more can be done to slow Russia’s advance. Investors may continue to evaluate the evolving situation, including the military conflict and sanctions response.
Economic Data Sheds Light on Global Economic Activity
The direct and indirect impacts of the war in Ukraine have been negative for global economic growth outlook. The U.S. appears less exposed than Europe and emerging markets. This week’s flash Purchasing Managers’ Index data will offer a look into the extent of the economic damage. Manufacturing and services for the U.S. and Europe are expected to retreat from prior levels, but remain at solid levels overall.
Central Bank Leaders To Speak
Several major central bank leaders will speak throughout this week, including Powell, European Central Bank President Christine Lagarde and Bank of England Governor Andrew Bailey. Russia-Ukraine impacts have made it more difficult for central banks to keep a lid on inflation without materially slowing down economic growth. Investors will look for insight into how central banks are planning to use monetary policy to thread this needle.
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