Weekly Market Update: Ukraine Tensions Continue to Unnerve Markets

Mon 21 Feb 2022

Market Update

Markets were whipsawed last week as traders scrambled to manage the risk of conflict in Ukraine on top of newly released minutes from the Federal Reserve’s most recent meeting. US stocks fell on Monday following a ‘sarcastic remark’ from Ukrainian president Zelensky, rallied on Tuesday after reports that Russian troops were pulling back, and reversed course again after US officials stated that they had no evidence of such a pullback. Minutes released by the Federal Reserve on the other hand were interpreted as dovish relative to expectations, as members did not rally around a policy of front loading hikes. UK and European stocks were similarly affected by these developments, falling -1.8% and -2.4%  respectively after a volatile week, while emerging market and Japanese stocks fell by smaller amounts of -0.5% and -0.9% respectively. Yields in the UK and EU fell in response to the geopolitical tensions, with the UK 10 year yield falling 16.7 bps and the German 10 year falling by 10.5bps. Oil ended the week down -2.1% after a mixed week, while gold stood out as a strong performer, continuing its rally to end the week up +2.3% in Sterling terms.

CIO Analysis

Asset Allocation

We feel that the market is not in a transitional phase, but rather at a crossroads.

On the right, a road returning tinvestingo as we once knew it: de-correlation, higher volatility, a world where opportunity and risk co-existed. Active asset managers will probably be rewarded and economic growth, albeit volatile, will be higher.

On the left, incredibly this is still a QE-driven world. A generation of consumers will turn into a generation of caretakers, as the world battles environmental change. Most shorter-term inflation pressures will eventually subside and what remains will be modest growth, secular stagnation-level prices, plus “Green” and “China Transition” inflation. In this world, QE has only taken a hiatus, to return as investors remain sceptical about assuming risks.

Which way we go is really a coin-toss. The central banks’ lack of real conviction about inflation, evidenced by their paced approach to hiking rates, suggests that either they are slow to realise that the world has changed, or that they want to cover some downside risks without compromising their central strategy.

Our take is that the world tends to move forward not backward. Both of these scenarios describe a world either before 2020 or one before 2008. In reality, there’s a third path, towards a new world emerging after the pandemic. A world at the cusp of the New Green Economy and more technological revolutions wrought by Blockchain, quantum computing and possibly a new form of energy that would make redundant the internal combustion engine. A path where nations realise that globalisation can’t be scaled back and that this interconnected world needs new economic and political theories if the transition to the next phase of the nation-state is not to become dystopian. In this world, central planning is subordinated to the bottom-up forces of the economy, and the picture that emerges will not be one driven by policy but the one of the most prevailing winds. Companies understand this and focus on positioning for the next decade. Some prepare their ‘metaverse’ and ‘blockchain’ strategies. Some focus on evolving hybrid work and a new way of managing. Meanwhile, supply chains are being repaired without -or even in spite of – national strategies, showcasing exactly how potent the power of businesses and innovation is to drive the economy. New theories will describe how the new world can evolve from the chaos of the old and how policy makers can restore civic supremacy.

The first two paths are easier to see, courtesy of hindsight and history. The third, and more likely, is lost in the mist. But, in our humble view, this is also the more likely one. We might not have an exact road map for it, but then again, when has there ever been one where the future (and not the past) is concerned? As asset managers, charged with preserving wealth for our clients, we need only ask ourselves not what paradigm of the past is more applicable but rather what vision of the future is more likely.

– David Baker, CIO