Energy prices soar amid Russian invasion of Ukraine

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In the latest edition of Market Week in Review, Chief Investment Strategist Erik Ristuben and Investment Strategy Analyst BeiChen Lin discussed the latest US inflation numbers and key takeaways from the recent policy meeting of the European Central Bank (ECB). They also provided an update on the war in Ukraine and its impact on global energy markets.

US inflation hits 40-year high as energy prices rise

Continuing the trend of recent searing U.S. inflation readings, Ristuben said the Labor Department’s consumer price index (CPI) rose 7.9% in February on a year-on-year basis, the biggest increase since January 1982.

“The usual suspects behind the spike in consumer prices were the same we’ve seen in recent months, with energy leading the pack, followed by food and housing costs,” he said. he points out. Inflationary pressures are likely exacerbated by the Russian invasion of Ukraine, which has introduced significant uncertainty to global energy markets, Ristuben added.

As for how the latest readings could influence U.S. Federal Reserve (FED) policy, Ristuben said a rate hike at the March 15-16 central bank meeting is essentially a foregone conclusion, noting that Chairman Jerome Powell has telegraphed an increase in major lending rates for several weeks. However, following February’s CPI figures, markets are now forecasting six interest rate hikes this year, down from five, he said. “Before Russia’s attack on Ukraine, that number was actually seven, but markets lowered their expectations immediately after the Feb. 24 invasion,” Ristuben explained.

He underlined that inflation remains a key point of vigilance for investors going forward, particularly with regard to energy prices. “If WTI (West Texas Intermediate) crude oil prices reach a range of $130 to $150 a barrel, macro expectations may need to be changed,” Ristuben noted.

Main takeaways from the ECB’s monetary policy meeting in March

Turning to the latest from the ECB, Ristuben said the European Central Bank caught the markets a little off guard when it announced on March 10 that its bond-buying program would end in the third quarter of 2022. That end date is sooner than expected, he explained, adding that the ECB has also adjusted its language around potential rate hikes.

“Previously, the bank said it would raise borrowing costs shortly after the end of quantitative easing. His March 10 statement, however, changed that wording to one day“, Ristuben said. This seems to indicate that even if the ECB will bring forward the end of its asset purchase program, it may not bring forward its rate hike schedule, he explained.

Ristuben said the European central bank is grappling with the same thorny problems as the United States: high inflation and soaring energy costs. However, because Europe is much more dependent on Russia for natural gas and oil, inflationary pressures in its energy sector are much stronger than in the United States, he noted. “The ECB has made it clear that it is very concerned about the impact of the war in Ukraine on energy prices,” Ristuben said.

Oil prices swing wildly in Russian-Ukrainian conflict

Focusing on the Russian-Ukrainian war, Ristuben said that unfortunately the latest developments suggest the conflict will drag on. “It seems very clear that Russian President Vladimir Putin is seeking regime change in Ukraine, and historically Putin is doing what he says he will do,” he remarked, noting that the attack on the Russia versus Ukraine is a humanitarian crisis with tragic consequences for millions of people. people,

In recent days, major index providers have removed Russian holdings from their equity benchmarks, Ristuben said, including FTSE and MSCI. “This reflects the fact that these providers view Russian stocks as non-investable,” he observed. However, Ristuben stressed the importance of understanding that Russia is not a big capital market and represents only 1.75% of the global economy.

“The real reason for the heightened uncertainty in the broader macroeconomic outlook is due to Russia’s status as an energy provider – and this uncertainty has recently triggered deep levels of volatility in energy markets,” Ristuben said. As evidence, he cited the dramatic swings in WTI crude oil prices. On March 8, the price of a barrel of WTI crude rose to $127, before dropping significantly on March 9 and 10 and settling near $106, Ristuben said.

“Since the dangerous zone for oil prices and the adverse effects they can have on economic growth are between $130 and $150 a barrel, $106 is much better than $127,” he remarked. no shortage of supply yet.

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the MSCI AC World Index (all countries): Captures large and mid cap representation across 23 Developed Market (DM) and 24 Emerging Market (EM) countries. With 2,791 constituents, the index covers approximately 85% of all global equity investment opportunities.

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