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Thursday 10 March 2022
March 2022 | The Russian full-scale attack on Ukraine has led to broad implications for markets. Global markets had not been pricing in a war scenario and are now adjusting to this military move; it will take time for the situation to settle down. In the meantime, uncertainty and volatility will persist, and we are likely to see some excesses to the downside.
01 | At the core of the crisis, Russian assets have become almost un-investible, with dramatic price action as the market attempts to grapple with uncertainty.
02 | Europe has been the hardest hit by the crisis due to its commercial ties with Russia. At the heart of the European agenda is the need to replace its oil and gas imports with new trading partners and accelerate its energetic transition toward renewables.
03 | The most notable market impact from the crisis is that Russian assets have become almost un-investable. Equity markets, particularly in Europe, have been characterized by a spike in volatility and energy prices have likewise been under pressure.
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Fed Chair Powell stated the need for a 50bp rate hike at the next couple of meetings. Powell's comments on rate hikes suggest the Fed remains comfortable with market pricing at this point, and will be even more data-dependent going forward. While there was little reaction in the financial markets following the release of the FOMC statement, after the press conference, which was not as hawkish as market expectations, there was a strong rally in risk assets.
In a widely expected move, the US Federal Reserve hiked the fed funds rate by 75bp to 2.25-2.50%, its second consecutive 75bp rate hike. The fed funds rate is within the 2 to 3% range of estimates of the long-term “neutral” rate. However, as Chair Powell reminded us during his press conference, policy needs to go beyond neutral into restrictive territory this year in order to reduce inflation.
We expect economic momentum to slow in the second half of 2022 as inflation acts as a regressive tax on consumers with huge divergences across regions, countries and sectors. However, we do not foresee a global recession. Inflation might be close to peaking in most areas, but we expect the inflationary environment to persist in 2022 and 2023.
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