This week

During another week of intense fighting within Ukraine, financial markets predominantly took their lead from any developments in the conflict, largely tracing their way downwards as the spectre of heightened inflation also weighed on investors’ minds.

Fuelling such fears are the soaring prices of oil and other commodities, reaching their peak on Monday morning. Aiding the sharp rise was the announcement that the US was willing to ban all Russian oil imports whilst the UK said it would faze them out by the end of the year. Whilst the news caused global bourses to plummet, commodity markets sprang in the other direction. Brent Oil briefly touched $140 a barrel, its highest since 2008, whilst Nickel priced rocketed 90% in a single day. Gold also joined the party, pushing through $2,000 an ounce whilst wheat prices jumped to a 14-year high.

With prices for both hard and soft commodities surging, inflation linked government bond yields sank, marked by German 10 and 30 bond yields falling to record lows. Whilst the commodity heavy FTSE 100 held up relatively well after the announcement, the US NASDAQ fell 3.62%, now entering into bear market levels.

It is worth noting just how volatile commodity markets can be, the perfect example coming on Tuesday as even a hint of diplomacy between Russia and Ukraine, agreeing to resume talks, sent oil prices plummeting 13%. A statement from the United Arab Emirates said it will hike its oil output to ease the volatility in energy markets, as Russia threatened to stop its own energy exports to Europe. The beleaguered Eurostoxx 600, gained 4.68% on the news.

However, by the end of the week, it became evident that it wasn’t just Russia that wanted to turn off the taps, it was also the European Central Bank (ECB). In this case however, it was the money taps rather than oil, as it was announced that the central bank will stop pumping money into financial markets this summer, paving the way for an increase in interest rates.

Whilst some policy doves at Thursday's ECB meeting argued the situation in Ukraine justified maintaining monetary policy for the time being, they were outnumbered as worries about inflation, which hit a record 5.8%, dominated the debate.

The inflationary backdrop seems to be much the same across the pond as it does across the channel, with US CPI data, released on Thursday, also reflecting spiralling price rises. The broad rise in costs reported by the US Labor Department alarmingly showed the largest annual jump in inflation in 40 years. CPI increased 0.8% last month after gaining 0.6% in January, with a 6.6% jump in petrol prices accounting for almost a third of the overall increase. Prices for fruit and vegetables increased by the most since March 2010, while the rise in the cost of dairy and related products was the largest in nearly 11 years.

Next week

With events in Ukraine set to dominate another week of market movements, we can at least examine the various economic data points set to be released during the coming days to get a handle on how the conflict is affecting price rises around the world.

There should be no better example of this than on Monday morning as German wholesale price readings are announced. The data acts as a leading indicator of consumer inflation as when wholesalers charge more for goods and services, the higher costs are usually passed on to the consumer. With Germany being the largest economy in the Eurozone and the most dependant on Russian gas, the numbers should take on added significance as we see just how prices are reacting.

Staying in Germany, the following day gives us the nation’s economic sentiment data, from a survey of 275 German institutional investors and analysts, asked to rate the relative 6-month economic outlook for the Eurozone. Again, this acts as a leading indicator of a nation’s economic health as investors and analysts are highly informed by virtue of their job, and changes in their sentiment can be an early signal of future economic activity.

The coming week should also see developments over in North America as the US Central Bank is widely expected to start its rate hiking programme on Thursday. Whether the Federal Reserve chooses to begin with a 0.25% or 0.5% increase remains to be seen but it is widely accepted that spiralling inflation in the world’s largest economy needs to be tamed rapidly, hitting a 40 year high of 7.9% the previous week. The rate rise will be ushered in during press conference by the bank, in which it will also detail how its committee voted on monetary policy as well as its outlook for the US economy.

The information in this blog or any response to comments should not be regarded as financial advice. If you are unsure of any of the terminology used you should seek financial advice. Remember that the value of investments can go down as well as up, and could be worth less than what was paid in. The information is based on our understanding as at 11 March 2022.