Russia/Ukraine War – Collateral Damage

The Russian-Ukrainian war poses additional challenges for European economies, which now face higher inflation risks and more headwinds to growth.

Russia/Ukraine War, Consequences

Russia continues its military offensive in Ukraine, despite chatter about another round of talks between the two sides. Russian currency and certificates of deposit are doing poorly this morning. Ukraine’s sovereign debt was also under pressure – the fact that Ukraine made a scheduled payment on its 2022 sovereign bond yesterday was noted, but had no impact on the market due to large tail downside risks . Concerns about global fallout multiply. However, the US Federal Reserve Speaker Jerome Powell said in his House testimony yesterday that the March rate hike still on the table. Since this morning, the price of Fed Funds Futures was 26-27 basis points in March, and a total of 5 rate hikes in 2022.

Growth in Europe, inflation risks

Regarding other major central banksstronger inflationary pressures (via food and commodity prices) and more headwinds to growth additional political challenges – especially in Europe/Central Europe. Sell-side economists have already started to revise down their 2022 growth forecasts for the region. At the moment the revisions are modest – about 1% or so – but if military operations last longer and affect more territory, we should expect more pronounced declines in growth. The prospect of larger budget deficits and worsening debt metrics – against the backdrop of massive refugee influxes – further complicates the picture. The graph below shows that Central European currencies underperformed their emerging market (EM) counterparts by a wide margin so far this year, as has local currency debt. Persistent currency weakness may increase pressure on regional central banks to increase further – this scenario is now reflected in 6-month market rate expectations. An alternative is to intensify interventions in the foreign exchange market – this option was used today by the central bank of Poland.

Debt relief for low-income countries

The last point we would like to raise today is the potential negative impact on low-income countries, some of which may be hit by the triple whammy of rising commodity prices, trade disruptions (wheat importers from Ukraine) and lower foreign direct investment/loans from Russia. Is the debt relief initiative for low-income countries – which was put in place during the pandemic – have to review in the next weeks? Stay tuned!

Originally posted by VanEck on March 2, 2022.

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PMI – Purchasing Managers Index: economic indicators drawn from monthly surveys of private sector enterprises. A reading above 50 indicates expansion and a reading below 50 indicates contraction; ISM – Institute of Supply Management PMI: ISM publishes an index based on more than 400 surveys of purchasing and supply managers; in both manufacturing and non-manufacturing industries; CPI Consumer Price Index: an index of the change in prices paid by typical consumers for retail goods and other items; PPI – Producer Price Index: a family of indices that measures the average change in selling prices received by domestic producers of goods and services over time; PCE inflation – Personal consumption expenditure price index: a measure of US inflation, tracking changes in the prices of goods and services purchased by consumers across the economy; MSCI-Morgan Stanley Capital International: a US provider of equities, fixed income, hedge fund stock indices and equity portfolio analysis tools; VIX – CBOE Volatility Index: an index created by the Chicago Board Options Exchange (CBOE), which shows market expectations for 30-day volatility. It is constructed using implied volatilities on S&P 500 index options; GBI-EM – JP Morgan Government Bond Index – Emerging Markets: comprehensive emerging market debt benchmarks that track local currency bonds issued by emerging market governments; EMBI – JP Morgan Emerging Markets Bond Index: JP Morgan index of sovereign bonds denominated in dollars issued by a selection of emerging countries; EMBIG – JP Morgan Emerging Markets Global Bond Index: tracks the total returns of external debt instruments traded in emerging markets.

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