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Russian invasion of Ukraine – One year anniversary

Market snapshot

14/03/2023
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The conflict has been a tragic negative sum game, devastating Ukraine which remains in the grips of a war with little hope it will be resolved via peace talks. In economic terms, the most significant impact of the war has been the effect it has had on global inflation which, despite edging away from recent highs, remains stubbornly elevated with investors and economists continuing to follow its path closely for clues as to the trajectory of central bank policy.

Mixed signals in terms of inflationary pressures

The recent data would suggest that inflationary pressures are resurfacing, though there are many conflicting signals for investors to contend with. For example, US new jobless claims once again were below 200,000 with the labour market remaining tight and labour costs surprisingly on the high side – both inflationary signals as they would tend to suggest wage growth, which in turn would push prices higher.

However, for the time being, wage growth has actually slowed with personal spending outpacing personal income, obfuscating the true picture. We know that this has been possible because consumers still have quite high levels of excess savings on aggregate, although lower-income cohorts will inevitably turn to debt in order to maintain their post-COVID living standards.

What have we learnt from the economic data released?

Amidst a barrage of economic data, the tone from businesses has been mixed where some are seeing customers pushing their orders back, others say the year has started strongly. This has been played out in markets with a generally softer tone in the US, with a 3.5% decline in the S&P in February, but a little more optimism in the UK and Europe. 

It is worth diving in to the sectorial make up of these markets which helps explain, the US has more exposure to technology companies which have generally struggled to meet and beat expectations as had been the norm. In the UK and Europe, sectors like Mining, Oil, Industrials and Consumer Goods have been influenced more by the reopening of China which has helped offset other pressures.

Despite the mixed business output, Fed Chair, Jerome Powell has persisted with a hawkish stance and thus US borrowing costs were pushed to 15-year highs. Powell is looking for sustained evidence that the economy is cooling off and price pressures are abating. 

Counterintuitively, at times like these, strong macroeconomic data can defer hope that rates have peaked and perhaps lead to a more prolonged period of higher rates and the headwind this causes. Reflecting caution, longer duration bonds, particularly inflation linked bonds, sold off.

What is happening in the Asian and European markets?

Asian markets were influenced by Hong Kong being on the back foot. Looking at this in more detail again, technology shares were noticeable underperformers with simmering political worries, adding to more general trading aspects consistent with the US tech companies as outlined above. Positive momentum in German stocks like Siemens and Volkswagen helped wider European confidence after a difficult 2022 and elsewhere Heineken, L’Oreal and LVMH provided further earnings optimism.

What is happening in the UK?

Back home, Rishi Sunak announced a deal with the EU on the Northern Ireland Protocol, potentially removing a major impediment to the implementation of Brexit. By resolving this issue, Sunak hopes to mend fences with the EU and hopefully nurture business investment which, given that it has stalled since 2016, would be welcome. 

This will hopefully add to better UK data with PMIs jumping, hinting that the economy may have regained its stride. Further, the GfK consumer confidence index also improved more than expected and survey respondents expect that the economy and their personal financial situations will be getting better in the future, albeit from very depressed levels.

In other good news for the UK, the government recorded a surprise budget surplus for the month of January, while Rightmove house prices were unchanged in February which will help consumer confidence. It will be interesting to see if these factors influence next months’ Budget, or whether any potential tax flexibility will be left to the November statement, being more timely with the general election in mind.

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