7th March 2022
The Cambridge Weekly – 7 March 2022
A double edged sword
During the course of the past week, the impacts of the war on global financial assets changed in nature. Last week, we wrote that minor sanctions were a help for asset prices even if the sanctions did not match the level of outrage. The European Union (EU), US and UK imposed new sanctions almost every day. Perhaps inevitably, this has resulted in equity market weakness.
February 2022: Capital market returns review
The economic consequences of Russia’s invasion of Ukraine continue to unfold but the beginning of the conflict, coupled with strong inflationary pressure and a tightening cycle for monetary policy, ensured a challenging February. Oil prices rose to above $100 a barrel and commodities in general hit all-time highs, pushing inflation further. While international sanctions against Russia were yet to filter though domestically, the value of the rouble collapsed, and Russian interest rates were raised from 9.5% to 20%.
China’s strategic partnership feels the strain
As horror unfurls in Ukraine, and sanctions wreak havoc on Russia’s financial infrastructure, a nation half-way across the world could be the key to any resolution. China’s foreign minister Wang Yi spoke to his Ukrainian counterpart Dmytro Kuleba last week expressing his concern at the crisis, with the latter noting he “looked forward to China’s mediation efforts for the ceasefire”.
Emerging market exposures
The financial fallout from Russia’s invasion of Ukraine has made life difficult for emerging market (EM) investors. After sweeping sanctions and asset seizures, Russia’s equity market entered a nosedive. That led Moscow to slamming its trading halls shut last Friday, and they have stayed shut since. On the bond side, sanctions against Russia’s dollar-denominated government debt have ceased all trading (and pushed the local ten-year yield up to a whopping 14%). EM funds with exposure to Russia are therefore under pressure to sell down their positions, but market closures make this very difficult. Generally speaking, implications seems to be stronger for the hard currency sovereign debt side than for equities.