Market Review - February 2022

March 1, 2022

By Jan Faure

Global markets rocked by Russian invasion of Ukraine

Global markets declined for the second month in a row as geopolitical risks dominated headlines following the Russian invasion of Ukraine. The S&P 500 index declined by 3.1% in what was a highly volatilemonth of trading. In Asia, Japan’s Nikkei 225 index fell 1.8% while Hong Kong’sHang Send index dropped 4.6%.

Unsurprisingly, Europe suffered the heaviest losses with the Euro Stoxx 50 index declining 6.0% for the month. Worst hit was gas dependent Germany with the DAX index falling 6.5% m-o-m. Germany signalled an about-turn in energy policy, raising the possibility of extending the lifespans of their coal and few remaining nuclear plants to cut dependency on Russian gas. Germany had earlie halted the $11 billion Nord Stream 2 Baltic Sea gas pipeline project which would have doubled piped gas from Russia to Germany. In a further sign of the rapidly changing times, the German government said it would spend €100 billion to boost its armed forces.

In Russia, the ruble tanked 22% against the US dollar as heavy sanctions were imposed by the West. The Russian central bank hiked interest rates from 9.5% to 20% to try stem the currency sell-off. The Bank of Russia was forced to close the country’s stock exchange as global financial institutions, companies and investors cut ties with Russia. Western nations agreed to exclude some Russian banks from the SWIFT bank messaging system and took measures to prevent Russia’s central bank from accessing its vast foreign currency reserves. Exclusion from SWIFT is highly disruptive and will, amongst others, obstruct Russia’s ability to sell its commodities and make interest payments to foreign bond holders.

Benefitting from the turmoil was the commodity sector. Russia and Ukraine are major grain exporters, while Russia is rich in energy and metals. Oil prices surpassed $100 a barrel for the first time in over seven years on supply fears. Brent crude closed out the month at $101 a barrel, again of 10.7% m-o-m and follows a gain of 17.3% in January.

Dow Jones Commodity Index: composite index of energy, metals and agricultural commodities

Wheat rose to its highest level in more than 13 years (+22%m-o-m), while aluminium hit a new record (+11.5% m-o-m). Russia and Ukraine together account for a quarter of global wheat exports and a fifth of corn sales. Russia is a major global supplier of many commodities including aluminium, nickel, palladium, oil and gas. As the war intensifies, the risk of logistical turmoil is also rising, with vessels finding it difficult to sail into the Black Sea.

Commodities YTD

The Ukraine conflict amplifies the risk of an inflation and growth setback for the global economy. There has already been a major impact on prices of commodities and equities. We expect volatility to continue, and there is a real threat to the Covid-19 recovery. Concerns around oil and gas supply from Russia will likely keep energy prices elevated for the foreseeable future which will ultimately be felt in people’s pockets worldwide. An immediate consequence may be adjustments to monetary policy. Already, US markets have shifted from predictions of a probable 50 basis point interest rate hike in March to a lesser 25 basis point hike.

GLOBALINDICATORS: Local reporting currencies

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