By Renée Friedman, PhD
The week in summary:
Welcome to Macro Insights #17. This week saw markets reacting to ongoing geopolitical tensions, the surge in energy prices following the invasion of Ukraine, and the run to safer assets.
Treasury yields and stock markets fell this week as the world prepared for the “will he/won’t he” game of Russian president Vladimir Putin although it is clear, by the markets’ response, that a full scale invasion was not fully priced in. Although the US, the EU, and possibly other countries may seek to impose even tighter sanctions against Russia and its associated assets and against individuals linked to Putin, it is unlikely that the conflict will expand beyond Ukraine’s borders into NATO states despite Lithuania declaring a state of emergency and asking NATO to invoke article 4 and hold consultations over the security threat. Estonia has also asked for a consultation. However it is likely that the continuing uncertainty will have investors flocking to the classic safe assets: the US dollar, the Swiss France, the Japanese Yen, gold, and bonds. On Thursday we saw the Nasdaq Composite move into bear territory as it is now more than 22% below its November peak and the Stoxx 600 entered into a technical correction as it was down more than 10% from its recent peak.
Although various ECB members have sent out slightly mixed messages over the past couple of weeks, it is clear, with the invasion of Ukraine, that policymakers are rethinking how this may derail economic growth in the eurozone as soaring energy prices will feed into inflation risks and lower trade for the eurozone, which relies on Russian gas for 40% of its needs. The invasion has further raised financial market turmoil and caused overall financial stability risks to rise. The ECB is thought to be meeting informally to discuss these issues as they will undoubtedly complicate the ECB’s movement in March. ECB policy maker Yannis Stournaras told Reuters on Thursday that “the central bank should continue buying bonds at least until the end of the year.” Last week other ECB policy makers had been suggesting a ramping up in the closure of the bond buying programme. It is now looking very likely that during the 10 March meeting, the ECB may now refrain from putting a definitive end date on its Asset Purchase Programme. However, the ECB already acknowledged, during the 3 February news conference by ECB President Christine Lagarde, that there were risks to eurozone growth and inflation from the Ukraine crisis; the question now will be, were they prepared for the worst?
The imminent policy tightening by the US Federal Reserve, aimed at combating rising inflation, is now being questioned. Expectations of a 50 basis point hike in March are now being muted as the Fed waits to see how the events in Ukraine will hit global supply chains in the medium to longer term. On Thursday Fed fund futures were still pointing to at least six rate hikes in 2022.
Energy markets went into overdrive following the reported invasion of Ukraine by Russian forces. The global benchmark, Brent oil, went over $100/barrel, reaching highs not seen since 2014 and European natural gas contracts surged 40 % to €117 per megawatt hour
Although the effects of this week’s events will primarily be felt in Europe, at least in the short term, emerging markets will also be affected. Energy importers will feel the pain as it impacts their ability to control inflation while others will suffer from the higher cost of capital as central banks react in addition to possible weakening of demand for exports. China, with its loosening monetary policy, may even be seen as a safe haven in the EM world along with other Asian markets such as Thailand, Malaysia and Vietnam.
Things to look out for this coming week
- In Europe on Friday is the Eurogroup meeting followed by a press conference from ECB President Christine Lagarde, German GDP data, French CPI, PPI and GDP, Italian Business and Consumer Confidence survey data, and Eurozone Business and Consumer Confidence survey data. On Monday there is Spanish CPI data. On Tuesday there is German retail sales data as well as Spanish, German, Italian, French and Eurozone Markit manufacturing PMIs. On Tuesday there is also Italian CPI and German CPI and Harmonised Index of consumer prices data. On Wednesday is Spanish and German unemployment data and Eurozone HICP data which is used to measure purchasing trends and inflation. On Thursday look out for Spanish, German, French and Italian Markit Services PMI, French and German Markit PMI Composite data, Italian unemployment data, and Eurozone Markit Services PMI and Markit PMI Composite. On Thursday there is also Eurozone PPI and unemployment rate data.
- In the US on Friday look out for Core Personal Consumption Expenditures - Price Index data, durable goods orders, non-defense capital goods orders, Personal Consumption Expenditures - Price index data, Personal income, personal spending, and pending home sales data along with the Michigan Consumer Sentiment Index. On Tuesday there is housing price index data, Markit PMI Composite, Manufacturing PMI and Services PMI data as well as Consumer Confidence Survey data. On Thursday there is a slew of data including the Chicago Fed National Activity Index, Continuing and Initial jobless claims, Core personal consumption expenditures and Personal Consumption Expenditure prices data, and New Home sales data. On Monday is the Chicago Purchasing Managers Index. On Tuesday look out for the Markit Manufacturing PMI, ISM Manufacturing PMI, ISM Manufacturing prices paid, ISM manufacturing employment index, ISM manufacturing new orders. On Wednesday is ADP employment change data. On Thursday there is a raft of data including continuing and initial jobless claims, non-farm productivity, unit labour costs, Markit PMI Composite, Markit Services PMI, Factory orders, ISM Services new orders, ISM Services employment index, ISM services PMI and ISM services prices paid.
- In the UK on Friday there is the GfK Consumer Confidence survey. On Tuesday is the UK Markit Manufacturing PMI. On Wednesday the Treasury will present its Budget report, which contains details about GDP growth forecasts, spending and borrowing forecasts as well as fiscal stimulus. On Thursday is Markit Services PMI.
There is also some interesting data coming from China on Tuesday with the NBI Manufacturing PMI, the NBI non-manufacturing PMI, and the Caixin Manufacturing PMI being released while on Thursday there is the Caixin Services PMI.
The converging tests for Europe
The events in Ukraine have shaken up markets as well as strained geopolitical alliances globally. This is especially true in Europe. The growing friction between Eastern and Western Europe will be reflected in the degree and willingness of individual European countries to impose tighter financial and physical sanctions against Russia in response to its actions in Ukraine. The idealised concept of a wider Europe with the same liberal values will now be sorely tested as economic concerns in some countries outweigh the historical concerns and experience of others.
The UN High Commission for Refugees is already warning of the potential flood of Ukrainian refugees to bordering countries. Poland is setting up reception points on its border and its hospitals are preparing beds for wounded Ukrainians. Hungary and Slovakia both say they are ready to welcome refugees and are sending extra troops to manage the likely influx at additional crossings set up on their borders with Ukraine. Moldova is already accepting refugees, mainly women and children, according to BBC news (Moldova) Germany has also offered humanitarian help to countries bordering Ukraine.
But these aren’t the only tests Europe is now facing. The events highlight the discord between the US and its European allies in terms of how each should contribute to NATO and to their own physical (and increasingly cyber) defences both monetarily as well as militarily. Although the US has ordered an infantry battalion task force of about 800 soldiers to deploy from Italy to the Baltic region, moved up to eight F-35 Lightning II aircraft from Germany to operating locations on NATO's eastern flank and also deployed AH-64 Apache attack helicopters from Germany to the Baltic region and moved 12 Apache helicopters from Greece to Poland, according to the US dept of defence, there will likely still be debate in the US as well as across European capitals about whether and just how much NATO member states should now contribute to maintain neighbourhood peace.
In addition to this new geopolitical quagmire, even though Europe may be moving towards the pandemic endgame (WHO Europe) there are issues related to other refugees, climate change, and, future pandemics caused by humans, e.g. the rise of antimicrobial resistance (AMR) (see the link between conflict and drug resistant infections) that it needs to respond to. The continuing flow of refugees from wars and civil conflicts across the Middle East and Africa trying to enter Europe may only be temporarily slowed by the events in UKraine; they are not going away. In fact the intensity of these refugee numbers may worsen as a result of ongoing climate change which is and will continue to result in more extreme weather events that create the conditions for civil wars as different ethnic and religious groups fight over resource access and ownership.
In short, Europe is now probably facing one of its hardest times since the disruption and euphoria caused by the fall of the Berlin wall all the way back in 1989 when Europe, in its fullest sense, began to be opened up to the world and had to redefine its place in it. How its policy makers work together or apart now may have much longer term and far reaching consequences that could change the very structure of its relationship with the US, the rest of the world, and among its own self identified states.
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