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Market commentary

The war in Ukraine remains central to the global backdrop. Militarily, the situation has shifted to a second phase focused on the east of Ukraine, although attacks on cities have continued across the country.

From a humanitarian perspective, it is still fraught. This is evidenced by the displacement of Ukrainians, both within the Ukraine and to the bordering countries. An estimated five million refugees have fled the country in just two months. The resulting economic effects will be material but will depend on the extent of the onward migration of the refugees from the initial host countries. The International Monetary Fund (IMF) estimates a 2.9% decline in GDP this year for emerging and developing Europe.

As the conflict goes on it is having an ever-greater impact on global economies as inflation is exacerbated by the conflict, given Ukraine and Russia’s collective importance in global commodity markets. While inflation is currently driven chiefly by commodities in the form of energy and foodstuffs, core inflation – which excludes food and energy – is also up. This is a clear sign of the broadening out of inflationary pressure globally, with particular concern over whether this translates into more entrenched inflation through wage rises in time.

12th May 2022


As elsewhere, UK inflation has soared. On the Consumer Price Index (CPI) measure targeted by the Bank of England, it jumped to 7.0% year-on-year in March. Further rises from here are virtually certain with April’s 54% energy price cap hike alone will add 1.6 percentage points to the annual rate and there could be a further rise in October, following the next review.

The Office for National Statistics (ONS) CPI series, which starts in 1988, has never reached such levels. It was only in the early 1980s that back tested numbers were last as high. High inflation along with the effect of the National Insurance hike, is underpinning fears that the economy may be headed for a downturn.

Weighing up inflation against growth risks will be very challenging for the Monetary Policy Committee (MPC). The latest increases in interest rate forecasts led to a fourth successive rate hike to 1% at the May meeting to keep inflation expectations in check. But the MPC has previously said interest rate rises will not have much of a direct effect on the current, commodity led inflation and markets expect they will only raise rates once more in 2022.


While the war in Ukraine has had the biggest impact on Europe, its effects may be balanced with the policy responses to the conflict. There is potential for large-scale infrastructure spending if the EU is to meet its objectives of diversifying away from Russian energy and increased defence spending is also likely, as states strive to meet the NATO spending target of 2% of GDP. While the conflict continues there is the risk of escalation, either militarily or economically, for example Russia to curtail gas supplies to more European countries.

Europe is also facing high inflation. The most recent figures for March recorded an all-time high Index of Consumer Prices rate of 7.4%. Clearly energy has been a significant factor, contributing 4.4 percentage points to inflation in March. The EU are behind the UK and the US in raising interest rates but there does appear to be a growing worry over the inflation outlook at the European Central Bank and the possibility of interest rate rises.

The French elections on 24 April saw Emmanuel Macron re-elected president, beating his far-right opponent Marine Le Pen 58.6% to 41.4%. Clearly, the European establishment will welcome the news, given the need for EU political solidarity in the face of Russian aggression.


As the conflict in Ukraine goes on, the rhetoric and policy support from the US is increasing. In April, further monetary support of over $20 billion was requested of the US Congress by the US President for direct support for Ukraine and in cooperation with NATO countries in the region. President Biden has insisted the US is not attacking Russia but with Russia themselves targeting military supplies from the US and other countries, there is always the risk of the conflict escalating further.

Consumer Price Index inflation in the US hit 8.5% year-on-year in March, with broad based price rises seen across sectors. Although consumer spending seems to have held up thus far, a hit to real expenditure for many households seems hard to avoid. As we have spoken about before, the balancing act will be for the Federal Open Market Committee (FOMC) to tighten policy aggressively enough to fight inflationary pressures but avoid choking off economic growth.

As elsewhere, inflation in the US will continue to squeeze household spending power unless matched by wages. But one reason why the US appears less at risk of a downturn than Europe is that, through the exploitation of shale oil and gas, the US now exports slightly more energy than it imports, in comparison to most of Europe that imports a large amount of energy. So, economy-wide, energy price rises are a net plus in the US compared to an increasing deficit in European Countries.

Emerging markets

Some emerging market economies, in particular those that are commodity-export led, especially the oil exporting nations in the Middle East, have done well recently with rising commodity prices. While there is much focus on exports, with global prices rising, a stronger dollar and US interest rate outlook can make investment into emerging markets less attractive and reduce capital flows. Many of these countries are reliant on foreign investor inflows to fund Government spending.

In March, China’s policy makers boosted market sentiment with a well-choreographed message that Government departments should ‘actively introduce policies that benefit markets’ which was seen as signalling increased monetary support.

In April, everyone has been surprised by the depreciation in the Chinese currency – the yuan, which has fallen by almost 10% against the dollar since the beginning of the year and 4.5% in April. This is surprising as China typically keeps the exchange rate fixed with monetary support but is largely due to rising interest rates in the US. Devaluation of the currency like this helps to make Chinese goods more competitive on global markets but will cause a further increase in the US trade deficit with China.

Defensive assets

There has been an acceleration of US interest rate rises with a 50 basis point rise at the Federal Reserve meeting last week, who seem to be increasingly worried they are behind the curve with inflation. With a backdrop of a strong labour market and robust economic performance, markets are expecting an additional 2% worth of hikes in US interest rates by the end of the year. Over the last month, treasury yields have rocketed, as markets have reassessed the Fed’s policy response. 10-year treasury yields have risen by 35 basis points, coming close to 3.0% at one point.

It is a slightly different story for the UK on Thursday at the Bank of England’s Monetary Policy Committee (MPC) meeting. While financial markets expected the 0.25% interest rate increase last week, it was seen as more of a “reluctant” hike. While we’ve all seen the headlines about runaway inflation, rising energy price caps and skyrocketing food bills, economic data has been less buoyant.

The Bank of England has a difficult job ahead of it – while inflationary pressures from external factors are getting higher, too much intervention could see a damaging fall to the economy. The MPC will know that stronger inflation will erode household spending power and while minutes of the last meeting saw some members vote for a 0.5% increase like the US, two of the members thought no rise would be better. There is certainly talk of Stagflation as we saw in the 1970’s, coming back. Hopefully the Bank of England learnt some lessons from the past when deciding on monetary policy.

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