Weekly Market Report: February 25, 2022

The Russian invasion of Ukraine dominated headlines last week in what felt like a slow-motion offensive which became very real very fast on Wednesday evening. We’ll refrain from commenting on the specific situation in Ukraine, as it remains too fluid for any tangible takeaways currently, instead focusing our attention on financial market reactions and potential economic implications. Along those lines, and as with most geopolitical events, markets seemed to have priced in a good deal of the fallout in advance, ultimately leaving financial markets in a push-pull situation between strong economic fundamentals and geopolitical risks. U.S. equity markets finished the week in the black while developed and emerging market equities traded down 1.3% and 3.8% respectively. Oil rallied in the overseas Brent crude contract, but WTI was flat on the week while interest rates in the U.S. actually increased across the curve and we saw a subtle bid in the USD.

Market Anecdotes

• Some historical perspective on market corrections and policy uncertainty serves as a reminder to avoid the ‘in the moment’ risk aversion urge and just play through or buy the mire. • Last week’s Russian invasion of Ukraine pushed the Ruble to a record low, the Russian stock market down over 35%, Brent crude prices over the $100bbl level for the first time since 2014, European natural gas prices up nearly 50%, and strong rallies across grains and metals. • U.S. trade and financial exposure to Russia is somewhat limited but Russia is the world’s third-largest producer of oil and second-largest of natural gas. Europe and China are most reliant on Russian energy exports. • While really bad news is clearly not yet priced in, we will be monitoring the situation closely as things unfold in Eastern Europe. In the near term, we do expect some short-term strength in the USD, continued tailwinds in cyclically oriented sectors and would favor more geopolitically insulated markets for the time being. • At this point it seems that treasury yields, the USD, gold, and credit spreads aren’t sounding any significant alarm bells. • Monetary policy trajectory seems marginally impacted thus far with the expected pace of rate hikes slowing slightly, due to tightening financial conditions, with an expectation for a 25bps hike in March. No changes are expected surrounding balance sheet activity. • Foreign stocks are holding up much better than their U.S. peers thus far in 2022 with valuations and rising rates likely playing a material role in the differing results over the short term. • While rental and housing prices have garnered a lot of attention in the inflation debate, energy has been the biggest contributor to inflation every month since February 2021 and last month it added 1.71% to the 7.50% YoY rise in CPI with the geopolitical unrest set to add to the trend.
This communication is provided for informational purposes only and is not an offer, recommendation or solicitation to buy or sell any security or other investment. This communication does not constitute, nor should it be regarded as, investment research or a research report, a securities or investment recommendation, nor does it provide information reasonably sufficient upon which to base an investment decision. Additional analysis of your or your client’s specific parameters would be required to make an investment decision. This communication is not based on the investment objectives, strategies, goals, financial circumstances, needs or risk tolerance of any client or portfolio and is not presented as suitable to any other particular client or portfolio.

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