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LGT Navigator: Monetary policies and geopolitics continue to set the pace

March 21, 2022

The interest rate turnaround and the war in Ukraine remain the dominant themes on capital markets. Thus, in the new trading week, the focus continues to be on the war and central banks. On Thursday, heads of state and government will meet in Brussels to discuss the Ukraine crisis. On the same day, the monetary policy decisions of the Swiss National Bank and the Central Bank of Norway are also expected.

Monetary policies and geopolitics continue to set the pace

Wall Street closed the last week – marked by the interest rate turnaround of the Federal Reserve – once again with strong gains. The Dow Jones Industrial went out of trading with a daily gain of +0.8% at 34'754.93 points and thus put a plus of almost five and a half percent on a weekly basis. The broad S&P 500 closed +1.17% higher at 4'463.12 points on Friday. Gains were even stronger on the Nasdaq, where the indices were up just over two percent before the weekend. The events on Friday were also determined by the options expiration day, which often provides for larger price fluctuations. However, technology stocks are proving surprisingly resistant now to the more restrictive stance of the Federal Reserve. This was underlined again at the end of last week by some top Fed representatives. For example, James Bullard, president of the St. Louis regional central bank, spoke out in favor of raising interest rates to more than three percent over this year. The yield for ten-year US government bonds traded at 2.15%, slightly below the high reached last week since mid-2019.

Asia's stock markets showed a mixed picture at the start of the week without a consistent trend. In Tokio, equity markets remained closed due to a holiday. At the center of events remains the geopolitical crisis in Ukraine and the confrontation with Russia. On Friday, US President Joe Biden and China's President Xi Jinping spoke on the phone on this issue, without concrete results. “As permanent members of the UN Security Council and the world's two largest economies, both countries should assume international responsibility and make efforts for peace and tranquility in the world,” Beijing said. But it seems important that at least the channels of communication remain open.

Russia's central bank seems powerless at present

After Russia's central bank raised its key interest rate by about ten percent to its current level of 20 percent following the start of Russia's invasion of Ukraine, the central bank left its key interest rate unchanged for the time being. Russia's economy is in a “structural transformation phase,” commented central bank head Elvira Nabiullina. In view of the massive sanctions imposed by the West and the frozen central bank reserves of around USD 600 billion, the central bank currently does not seem to be able to do much to counter the collapse of the ruble and the foreseeable rise in inflation as well as declining economic growth.

Russia's credit rating further downgraded by S&P

The US rating agency Standard & Poor's has downgraded Russia's credit rating by another notch to “CC.” This means that the rating is now only two notches above a default. The question is whether the Russian state will be able to service interest payments due on government bonds despite the sanctions. In any case, S&P sees Russia's solvency at risk. The rating agency also pointed out that a default could occur if investors did not have access to their money or if payments were made in a currency not listed in the bond terms and did not agree to an alternative payment.

When will the ECB also start its U-turn maneuver?

Now that the Federal Reserve has completed its turnaround on interest rates and other central banks are also already pursuing a more restrictive monetary policy course, pressure is growing on the European Central Bank (ECB). Central bank president Christine Lagarde stressed last week that the ECB would have to pursue a much more flexible course because of the crisis in Ukraine. According to Lagarde, in the current environment, the ECB's monetary policy must follow the three principles of optionality, gradualism and flexibility. In doing so, the ECB is in a dilemma; on the one hand, the war and the conflict with Russia are causing high uncertainty and, above all, rising energy prices, which in turn is fueling already high inflation, and on the other hand, the war and inflationary pressures could increasingly jeopardize the economy's recovery from the pandemic. Within the ECB Governing Council, meanwhile, the hawks are getting louder and, for example, ECB Governing Council member Klaas Knot said that the ECB could decide on one or possibly even two interest rate hikes as early as this year.

  

Economic Indicators March 21

MEZ Country Indicator Last period
00:00 JP Holiday
08:00 GE Producer Prices (February, y/y) +25.0%
13:30 US Fed Chicago National Activity Index (February) +0.69

 

Earnings Calender March 21

Country Company Period
US Nike Q3

 

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Publisher: LGT Bank (Switzerland) Ltd., Glärnischstrasse 36, CH-8027 Zurich
Editor: Alessandro Fezzi, E-Mail: lgt.navigator@lgt.com
Source: LGT Bank (Switzerland) Ltd.

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