The economic consequences of Russia’s invasion of Ukraine continue to unfold but the beginning of the conflict, coupled with strong inflationary pressure and a tightening cycle for monetary policy, ensured a challenging February. Oil prices rose to above $100 a barrel and commodities in general hit all-time highs, pushing inflation further. While international sanctions against Russia were yet to filter though domestically, the value of the rouble collapsed, and Russian interest rates were raised from 9.5% to 20%.
In the US, inflation measured by the Consumer Price Index (CPI) could exceed 8% for February. The CBOE Volatility Index (VIX) ended the month just above 30, significantly higher than a few months ago, but to put this into perspective the VIX reached 82 during the worst days of the Covid-19 crash just a couple of years ago. Global equity market volatility continued throughout February, declining 2.6% for UK sterling investors on the back of central bank tightening, inflation worries and geopolitical tensions as a result of Putin’s invasion of Ukraine.
The US equity market fell 3%, with the technology sector down 3.4% driven by escalating tensions between Russia and Ukraine and expectations of higher interest rates, following a more hawkish approach from the US Federal Reserve (Fed). Some of the losses were offset by encouraging earnings reports by many US firms, as well as positive economic data in the form of the Purchasing Managers Indices (PMIs), which indicated improved business sentiment and near-term economic growth. European equities ended the month down 3.9%, despite strong Q4 earnings for many firms and specifically the energy sector, as worries over sanctions against Russia and potential tightness in the supply of energy drove investor sentiment down. Similarly, Emerging Markets dropped 3%. Japanese equities were more resilient over February, declining 1.1%.
The UK was the only equity market that ended February in positive territory, up 0.3%. Companies were supported by positive economic indicators and by the recent commodity rally which boosted the energy and materials sectors. The UK market continued to benefit from the inflationary backdrop, with still elevated interest rate expectations bolstering the banking sector. In commodities, oil prices soared 9.8% over concerns around Putin’s invasion of Ukraine. Gold prices climbed 6.3% on the back of the escalations.
Uncertainty is high and for the global economy, energy prices and the action of central banks are the key indicators.
Asset class returns at 28th February 2022
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