Flipping the Energy Equation
As Russia’s attack on Ukraine intensified, U.S. started discussing a ban on Russian energy imports. News of a possible Russian energy embargo resulted in crude prices touching an intraday high of $130 a barrel, the highest level since July 2008. Russia is the largest exporter of natural gas accounting for a little under a fifth of the world’s natural gas production and is the second largest exporter of crude. Furthermore, Russia and Ukraine are also key producers of agricultural commodities. Sanctions on Russia’s energy industry may strain the commodity channels underpinning the global supply chain, adding to general price pressures that may result in elevated inflation lasting longer.
Markets Run out of Fuel
The Russia-Ukraine war has also dampened sentiment across global markets. Markets across the world fell on fears of 1970s-style stagflation increasing the costs on companies and consumers. While Russia accounted for 45% of the European Union’s gas consumption, the U.S. is far less dependent on Russia. Russia supplied just around 8% of U.S. crude and refined products in 2021. We think the conflict will have a more direct impact on Europe than on the U.S. and Canada.
Central Bank Challenges
The war has also complicated the job of central banks across the world. Even before the Russia-Ukraine war became a reality, our view was that markets were aggressive in their pricing of rate hikes from the U.S. Fed and the Bank of Canada. Lately both these central banks referenced the Russia-Ukraine as a new risk factor adding an exogenous source of uncertainty to their policy making. We believe both these central banks to still move ahead with rate hikes over the next few policy meetings. However, we also think that policymakers will be flexible to incoming data on inflation in the face of decelerating but positive growth and rising risks.
Given the uncertain environment, we continue to maintain our broadly neutral risk positioning. Over the last weeks, we have deployed some of our cash overweight to core bonds and have been adding to more defensive and higher quality U.S. equities.
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