Ukraine Invasion Generates More Volatility But Markets Remain Focused On Inflation

This week saw the war in Ukraine drag into its second month. Putin’s plan for a swift victory are now stuck in the mud around Kyiv as the beginning of spring sees no obvious end to the conflict. The war continues to rattle markets and oil and gas have once more seen the most extreme shifts as news of energy deals with the US and Russia turning off supplies have moved prices around. Much like the outlook for the war itself, the eventual outcome is very hard to see and the market movements appear to be a result of the extreme uncertainty.

Elsewhere, government bonds have also seen some big moves with yields rising this week. Despite the ongoing war the short-term economic outlook remains stable but concerns about inflation continue to dominate. Central banks on opposing sides of the Atlantic appear to be heading in the same direction, but at noticeably different speeds. A lot of attention has been on the US, where more aggressive action is being priced in. In the UK, moves may feel dramatic but 10-year gilt yields are back to 2018 levels when interest rates peaked at 0.75%.



UK Flag thumbnail blogData out this week showed growing headwinds for the UK economy as inflation rose to 6.2% in February, reaching its highest level since 1992. The biggest factors were transport, housing and clothing. Consumer confidence continued to fall as people expect their personal finances to worsen as living costs continue to rise. Retail sales decreased unexpectedly, falling 0.3% in February, however, business confidence remains strong as UK Composite PMI fell slightly to 59.7 and showed growth in the service sector.

Chancellor Rishi Sunak presented a relatively strong picture of the government’s finances with tax receipts boosted by rising inflation and government borrowing lower than expected. However, the outlook for growth has been cut from 6% to 3.2% by the Office for Budget Responsibility. The chancellor announced measures to offset inflation, including a 5p reduction on fuel duty. He also raised the threshold for paying national insurance, but stuck with the planned rise in the NI rate which means most workers will still end up paying more.




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Government bond yields have continued to rise this week. US Treasuries have seen some of the biggest moves after Jerome Powell, chair of the US Fed, said an interest rate rise of 0.5% remains on the cards for the bank’s May and June interest rate meetings. UK gilts have also seen yields rise, as bond values have fallen, although this was slightly reversed at the end of the week.

With inflation in Europe currently lagging the US and UK, the European Central Bank is still some months from a first increase with bank officials raising the possibility of a first hike in Q3 this year. The UK is firmly on a tightening path with three 0.25% rises already. But with inflation below the US, and the bank expressing concerns about the effects of the war in Ukraine, expectations about the pace of future rate hikes have eased significantly. The US remains the most hawkish in its attempts to rein in inflation but yields on longer-dated bonds are unmoved which suggests investors think the tightening may be short-lived.




Trading in shares of Evergrande Group, currently the world’s most indebted property developer, was suspended as markets waited for news of the company’s restructure. The company is also facing legal action from its bondholders following reports that Chinese banks have claimed back more than $2bn of cash from a subsidiary.  Evergrande was declared officially in default in December and has debts of $300bn and owes around $20bn to overseas investors. The company has warned its financial statement for 2021, due next week, will now be delayed.

The real estate developer is at the centre of an escalating liquidity crisis across China’s property sector. Other developers are now also in default and many others are finding it hard to access new borrowing. Property has contributed around a third of China’s economic growth and a protracted slowdown presents a considerable problem for the wider economic outlook of China.


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