23 June 2022
The initial fallout from the war was a significant factor in global capital markets experiencing their weakest quarter since the onset of the pandemic. However, with little sign of a resolution, the primary focus of investors over the past few months has shifted towards one central catalyst that has been dominating the markets: tighter monetary policy to address persistent and potentially runaway inflation, with this accomplished without causing a recession. Weakness in China has also been a factor, with continued Chinese lockdowns in the country’s renewed battle against COVID hampering supply chains. The result has been pain across asset classes. For context, strategists at Deutsche Bank expect the S&P 500 index to post its worst first-half performance since either 1932 or 1962, while 10-year US Treasuries are set for their worst first-half since 1788.
The biggest impact of the war on asset prices has come in the form of commodities and their related equities. Oil initially jumped to nearly US$140 per barrel on the anticipated disruption, before fluctuating between $100 and $125 or so as supply disruptions and plans by the European Union to ban Russian crude oil and refined fuels by the end of the year were countered by expectations of reduced demand in a recessionary environment. Gas has also remained elevated, with Russia already blocking supplies to nations including Poland and Bulgaria and said to be considering limiting supplies to the broader continent over the upcoming winter months. Goods such as grains have also spiked, given Ukraine’s importance to that market.
The Russian equity benchmark – shut for three weeks from the outset of the invasion – trended higher following the reopening on two key drivers. First, high commodity prices have mitigated some of the impact of Western sanctions. Second, the Bank of Russia cut interest rates more than forecast to support the economy. Recently, however, the index has drifted lower, with volumes significantly down on pre-invasion levels.
After collapsing in the wake of Russia’s invasion, the ruble has embarked on a stunning rebound as emergency capital controls and sanctions made large-scale capital flight impossible. Surging prices for Russia’s commodity exports, in combination with the collapse of imports as consumer demand sags, have led to a surplus of foreign exchange and further powered the ruble, which is up almost 40% this year against the dollar, making it by far the best performing currency globally.
In fact, a recent report by the Helsinki-based Center for Research on Energy and Clean Air said that in the 100 days after its invasion, Russia's revenue from exports of fossil fuels soared to almost US$100 billion, with most of that coming from the European Union. Bloomberg estimates that Russia will earn nearly US$321 billion from energy exports this year, an increase of more than a third from 2021, and leading to Russia’s largest current-account surplus in almost three decades, according to publicly available data going back to 1994.
The broader outlook is also turning more favourable, with some forecasters seeing a far shallower recession this year than anticipated in the immediate weeks after the invasion began.