Market Updates

The war in Ukraine is causing a major supply shock layered onto an existing one, and we see it resulting in higher inflation and lower growth, especially in the euro area. This puts central banks in a bind: Trying to contain inflation will be more costly, and they can’t cushion the growth shock.

Events in Ukraine will continue to be a key driver for investor sentiment, with markets likely to see-saw on any meaningful news. It is a busy week for central banks too, with the Fed policy meeting on Wednesday, Bank of England on Thursday and Bank of Japan on Friday.

Government bonds have shown some traditional diversification properties since Russia’s invasion of Ukraine last month. Yet our work shows that government bonds historically offer less diversification during periods of supply-driven inflation.

Soaring commodity prices and the commensurate inflationary impact is alarming investors. The fear is that European consumer confidence and spending will be hit, and we find ourselves in a stagflation environment, with stagnating economic growth (or recession) and soaring inflation.

The Russian invasion of Ukraine is a human tragedy. We now know what we are dealing with: a protracted stand off between Russia and the West. BlackRock also think it
has reduced the risk of central banks slamming the brakes to contain inflation.

It is well known that the pain from the gas price moves is significant, particularly for Germany and Italy. The Italian government has said it is reviewing options, including reopening shuttered coal plants. In Germany, the government is reported to be considering delaying the phasing out of nuclear power.

The situation on the Russia-Ukraine border keeps escalating as President Vladimir Putin ordered troops into eastern Ukraine after recognizing breakaway regions as independent, adding to confusion about the macro and policy outlook.

The transition to decarbonize the world is happening and investors can no longer ignore it. Increasing investor preferences for sustainable assets are leading to a great repricing that has a lot of room to run, in BlackRock’s view. This doesn’t preclude browner assets such as traditional energy stocks from staging rallies at times.

Central banks are giving ever more hawkish signals to appear to be responsive to surging inflation. Normalizing policy rates to pre-pandemic levels makes sense to BlackRock, as the powerful economic restart does not need stimulus. Markets are betting they will raise rates well beyond that. They disagree, as such policies wouldn’t contain inflation without a heavy toll on growth.

Last week saw markets whipsaw from day-to-day as nerves remained brittle over central-bank policy, geopolitics risk and corporate earnings. The key focus for last week was Wednesday’s Federal Reserve (Fed) meeting, which saw Chair Jerome Powell maintain a hawkish stance and leave an interest-rate hike at the March meeting on the table.