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“A Time for Iron Resolve”

Following January’s bout of volatility, February failed to provide any reprieve as markets continued to have difficulty pricing the risk of a more aggressive Fed. This, combined with Russia’s shameful invasion of Ukraine on 24-Feb-22 caused the S&P 500 to fall 3% during the month, marking an 8% decline year-to-date. The MSCI Index fell 2.4%, while the TSX’s exposure to energy and materials helped it remain flat for the period and just below break-even for the year. The unrest in Eastern Europe arrested the weakness in the U.S. Dollar and U.S. Treasuries, as investors flocked to the traditional safety of the world’s largest and most liquid economy. Nevertheless, the DXY was only flat for the month, and the 10-year yield rose 0.19%, down from 0.28% prior to Moscow’s attack.

Commodities continued to catch a bid in February, no doubt fueled by tensions in Eastern Europe where either Russia or Ukraine are key suppliers of oil, natural gas, wheat and palladium. The implementation of economic sanctions on Russia including the removal of Russia and its major banks from the SWIFT network will inflame an already hot market. Simply put, the SWIFT network allows banks, including Russia’s central bank, to send and receive payments. These actions are designed to limit the flow of exports from Russia and to prevent Vladimir Putin from using $630 billion in central bank currency reserves to fund its war. Accordingly, the decline in Russia’s provisions will further stress the already undersupplied commodity market thereby pushing prices higher. The global consumer is already feeling the effects of a commodity bull market that began in mid-2020. Additional stress on the consumer is a major political risk in an economy that is starting to slowdown. This is a major predicament for global central banks. Tighter conditions are needed to cool demand and soften food and gas prices, but if they overreach, they could be inserting the equivalent of the 1995 New Jersey Devils’ Neutral Zone Trap into the economy. Will inflation surprise to the upside and force the Fed to tighten more aggressively? Or, will the geopolitical situation provide an out for the Fed to delay its hiking cycle?

Commentators, reporters and “experts” are rarely short on reasons for market movements. However, it is foolish to predict the outcome over the next 24 hours or the next week based on a news headline. For instance, the S&P 500 futures market was down 10% (month-to-date) after Putin announced that he ordered a special military operation in eastern Ukraine and missiles struck dozens of cities across the country. Since that low point, the market rallied 7% in two days. Rather than attempt to foretell the following week or month’s events, we can only offer that the confluence of factors will provide an environment of heightened volatility. Therefore, for markets, and more importantly the innocent lives in Ukraine, the absence of peace will create more uncertainty, fear and arbitrary outcomes. Additionally, a more involved NATO/U.S. could also increase the risk of a nuclear threat and the unknown consequences.

Looking forward to the upcoming month, all eyes were originally fixated on the Federal Reserves’ meeting in mid-March. The impact that commodity prices, in particular oil and agricultural products, were having on inflation were primary considerations for the launch of an interest rate tightening cycle. However, the geopolitical and humanitarian events associated with the Kremlin’s senseless aggression, have distracted people’s attention while also compounding the central banks predicament. At this point, and in most aspects of forecasting, we can only be certain of uncertainty.


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