Financial markets started another volatile week on Monday, extending their declines after leading stock market indices fell sharply on Friday amid worries about the ripple-effects of Russia’s war against Ukraine. Oil prices surged further on Monday, with North Sea Brent crude trading near a record high 139 dollars per barrel amid talk of a ban on Russian oil imports.
“Amid grave uncertainty, European risk markets have every reason to sell off,” Berenberg’s chief economist Holger Schmieding said in a note to investors. “Or do they? One of the lessons I learned in 30 years in markets is simple: in the thick of a selloff, lean back and look at the big picture.”
Aneeka Gupta, research director at fund manager Wisdom Tree, said risk premiums in Europe have risen sharply in recent trading days amid accelerating earnings yields and a rise in bond yields. “Europe is most at risk owing to its high dependence on Russia for energy and its proximity to the situation,” he wrote.
“While European equity performance has declined in lockstep with tightening financial conditions, we feel investors are discounting three important factors in their allocation to Europe. One: consensus earnings revisions re-accelerating for 2022. Two: continued fiscal support via the Resilience and Recovery Fund. And three: monetary policy is likely to remain accommodative until de-escalation of the war.”
A note by Allianz Global Investors advised clients to consider “a defensive stance, including safe-haven assets like gold and longer-term government bonds.” Allianz said equity portfolios should “remain diversified across both themes and styles, such as growth and value.”
ECB dilemma complicated
The European Central Bank is due to provide more clarity on Thursday as its governing board will discuss the effects of the war on Europe’s economy. President Christine Lagarde is due to speak in a press conference on Thursday.
“The complex combination of a war and severe sanctions are likely to prompt the ECB to ignore higher inflation and postpone the withdrawal of the stimulus for now,” Wisdom Tree’s Gupta said on Friday.
“However, the war in Ukraine complicates the ECB’s dilemma of tackling accelerating inflation that cannot be softened by monetary policy. Russia’s invasion of Ukraine is adding to the long list of constraints and bottlenecks that are impacting global supply chains since the start of the pandemic. As a result, commodity prices are surging higher amidst concerns of supply disruptions and port closures.”
‘Near-staglation’
Berenberg’s Schmieding said the Eurozone economy will likely remain “in the near-stagflation” into which it had fallen during the pandemic. “A recession looks unlikely… the Eurozone does not suffer from excess demand, excess capacities or financial excesses that, after being laid bare by an external shock, would require a cleansing recession for domestic reasons.
Schmieding advised investors to consider a range of arguments. While the war is set to get worse in the coming days and weeks, more clarity can be expected by late April or May and a Russian occupation of Ukraine will ultimately be costly and unsustainable, encouraging further discontent with Putin’s aggression in Russia.
The blow to consumer and business confidence in Europe will likely fade as the outlook becomes clearer, Schmieding said in his note.
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