Weekly Comment: Uncertainty ahead – 15/02/2022

Global equity markets started last week in recovery mode, but two events dampened enthusiasm as the weekend approached. Thursday saw another forty-year high measure of US inflation, with the CPI showing an annual rise of 7.5%. While this was ahead of expectations, the markets initially took the news reasonably well. However, subsequent comments from James Bullard of the St. Louis Fed stopped the market in its tracks. His suggestion that the Fed should raise rates by 50bp at the March meeting was not in anyone’s playbook and shares headed south once more. If this were to take place, it would be the first time since May 2000 and would be evidence that the US central bank has finally admitted that it is behind the curve in terms of tightening monetary policy.

The spectre of Russia invading Ukraine has been with us for some weeks, but US President Biden sparked another bout of selling in markets when he said on Friday that the Russians looked prepared to launch an incursion, perhaps as soon as Wednesday. In truth the only person who knows what will happen is President Putin and he is saying very little. Diplomatic channels remain open, so there is still time to avoid conflict. Markets historically find it difficult to price geo-political events because the outcomes are so unpredictable. An invasion of Ukraine might lead central banks to hold off on raising interest rates, but the trade-off would hardly be occurring in the most favourable of circumstances.

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