Semi-monthly Update March 4th 2022

March 04, 2022 | Thomas Donnelly


The jobs of the central banks have become more complex given the Ukraine/Russia situation.

All eyes continue to be squarely focused on the military conflict in the Ukraine. Not surprisingly, volatility remains elevated given the uncertainty in the wake of Russia’s invasion. Yet, many equity markets outside of Europe are actually higher than where they stood prior to the recent escalation. This may seem unusual but it compares similarly to other major military conflicts through history where global markets priced in the risks before the start of a war, only to witness some price stabilization shortly after the fighting began. Nevertheless, the situation is fluid and it is important to remain vigilant.


Our firm’s global investments team has produced an interesting update on the Ukraine/Russia crisis, with a particular focus on the impact to the European economy and implications for the region’s investment outlook. Most interesting was the discussion related to Europe’s dependency on Russia for its energy needs and the region’s decarbonization efforts, and the transformations taking place within the region that could result in a more unified European Union going forward. We believe this recent piece is a worthwhile read.


The other issue raised in the aforementioned report focuses on the central banks, whose difficult jobs have now become more complicated. Over the past week, the Bank of Canada raised interest rates by 50 basis points, as was largely expected. The U.S. Federal Reserve remains poised to raise interest rates by the same amount when it soon meets. While both central banks are expected to hike rates further through the year, the outlook on the exact path of rate increases is starting to look increasingly murky.

Elevated inflation was a headwind entering the year but was expected to moderate to some extent as the year wore on. But, any relief is now in jeopardy because of the war and its impact on supply chains, and in particular the commodity complex. Russia and the Ukraine are important producers of a variety of commodities. Crude oil, natural gas, coal, wheat, corn, sunflower oil, palladium, nickel and aluminum are just some of the commodities that have moved higher of late and year-to-date. Barring any quick resolution to the situation, these prices may remain elevated and keep inflation higher for longer.


Corporations, and consumers in particular, have some capacity to handle higher costs given strong balance sheets, benefits from the economic reopening, and elevated levels of disposable income. But, it is not hard to fathom that there could eventually be a drag on global growth should price pressures mount further or stay elevated for an extended period of time. Central banks, who were predominantly focused on inflation to start the year, now have to contend with the uncertain economic consequences posed by an unpredictable conflict between the Ukraine and Russia.


The new state of global affairs may lead central banks to approach their rate hiking campaigns more gradually than originally planned. A slower pace would undoubtedly be welcomed by investors as long as the risks of recession remain relatively limited. For now, that continues to be our base case scenario.


Should you have any questions, please feel free to reach out.