14th March 2022
The Cambridge Weekly
Positioning for the energy price shock
Global capital markets continued their wild ride last week, as market participants struggled to gauge by how much would Putin’s barbaric war on Ukraine dismantle their 2022 outlook for the global economy. Wild equity market swings are usually the focal point for investors when major upheaval occurs, but this time the oil price has been front and centre. The rising cost of energy has become the key economic variable derailled by Putin’s actions. This week we dedicate a separate article to what has changed (but also what probably has not changed) in terms of the medium-term outlook for the price of oil.
Market and investment activity update
For the last few weeks, we have regularly had to caveat our commentary with the phrase “as we write”. The German DAX benchmark equity index (which tracks the top 40 German companies) has on average moved every 30 minutes over the past year. Markets go up and down, but in the past week the DAX has moved up and down every 30 minutes on average about 0.75%. On Friday, for example, President Putin said that the Ukraine-Russia talks taking place in Turkey have “positive movement”. Within five minutes, the DAX rose 3%.
Russia vs the global financial system
Russia’s unprovoked invasion of Ukraine continues to dominate financial news as much as it does politics. Western sanctions have so far pushed oil and gas prices to eye-watering levels, caused the removal of Russian assets from capital market indices and led to a wave of asset freezes for oligarchs with links to the Kremlin. Major equity indices have taken a beating in that time, with the Euro Stoxx 50 down sharply since late February, and the S&P 500 and FTSE 100 having suffered as well. There was some reprieve for investors from Wednesday onwards, as all those indices rebounded. But this may ultimately still prove short-lived, as market participants clearly continue to be concerned about the fallout from war.
Oil price moves in 2022 have been astounding if not unprecedented. Having started the year at around $80, during trading last Tuesday, a barrel of Brent crude oil cost more than $130, before coming back down to just under $128 as trading closed. That is the highest global oil price in a decade, as western sanctions on Russia put the world’s fuel supply under threat.