Market Overview – 10/03/2022

As the world looked on in alarm as events unfolded in Ukraine last week, markets sold off sharply reflecting the increasing uncertainty. A missile attack on a Ukrainian nuclear power plant only added to the sense of nervousness, recalling the radiation leak at Chernobyl in 1986, coincidentally also in Ukraine. Thankfully no damage was done but it serves to remind us how difficult it is to predict the course of the Russian invasion. Oil prices surged over the week and then again on Monday on talk that the West may ban imports of Russian oil and gas. Russia is the world’s third largest oil producer and exports around 5 million barrels of crude oil a day. Most of this goes to Europe. Additionally, Russia supplies about 40% of the EU’s natural gas imports and two thirds of Germany’s. Hitherto, sanctions applied to Russia have largely been financial e.g. restricting access to the global banking system. There is pressure to apply them to energy now as Russia escalates its attacks on Ukraine. Higher energy prices will contribute further to already elevated levels of inflation. Central banks will therefore have to weigh up the trade-off of applying higher interest rates to curb inflation, against slower economic growth resulting from what is, in effect, a tax on consumption.

In the face of yet another crisis, how resilient is the global economy? The huge fiscal and monetary stimulus packages announced at the height of the covid pandemic are still giving a positive impulse to economic growth, which generally remains above trend. Unemployment rates are low and there remains many unfilled vacancies. It is estimated that excess consumer savings are around $2 trillion in the US and $3.5 trillion globally. Meanwhile the corporate sector is in good shape, with enough free cash flow to buy a record $850 billion of their own shares last year. How long this new war in Europe lasts is unclear, but the shock-absorbing ability of the global economic system to cope is far stronger than it might otherwise have been.

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