LONDON, Nov 11 (Reuters) – Defusing this year’s biggest shock to the global economy could catalyze a rebound in global markets that many investors believe is too late – but could also raise other uncomfortable puzzles.
Whispers about an endgame to Russia’s 9-month-old invasion of Ukraine – suggestions ranging from ‘talking talks’ to a brokered ceasefire – have swirled in the media across the country. course last week. All have been watched as carefully by global investors as they are by politicians or military strategists.
As another major Russian retreat from the battlefield unfolded, speculation grew sharper about direct talks between Washington and Moscow, Kyiv’s adamant refusal to press for negotiations and some fears that the post standoff -congressional election could prevent further military aid to Ukraine.
And it all took place ahead of next week’s G20 summit in Indonesia – where Washington and Beijing are at least seeking to calm recent tensions between the two biggest economic powers.
What is certain is that the carnage, destruction and misery in Ukraine since the February 24 invasion has been beyond scale – with Russia’s vast military casualties and economic isolation at a high price for stalemate and dwindling territorial gains.
But the global economic repercussions after February were arguably greater than those of any conflict since the end of the Cold War 32 years ago – and far beyond increased military and defense spending in Europe and the United States. United States.
Western sanctions imposed on Moscow have sown an explosion in energy and food prices that has worsened and prolonged the post-pandemic inflation surge around the world. This forced massive additional government spending to ease costs for households and businesses and sharp interest rate hikes from major central banks.
The cost of living crisis and the recession warning have combined with a global flight of liquidity and have increased geopolitical risks everywhere. The result was that mixed stock and bond investing had its worst year in a century.
Even the smallest burst of light in this darkness can seem like a ray of hope right now.
Despite bottoming out a month ago, global equity indices are still 16% below levels seen in the first week of February – when US intelligence first warned that a full Russian invasion was on the cards. Global government bond prices are down about 20% and the dollar has strengthened 14% since then.
To be sure, few would assume that the end of the conflict would lead to a return to square one, whether politically or economically, not least because inflation and broader economic trends have taken on their own. And Ukraine’s bills, Russia’s isolation, energy disruptions and military tensions could all simmer for years, even if the “hot war” ends.
But some easing could still have exaggerated effects on the global investment landscape, if only by increasing visibility over the next year, reducing some of the worst military “tail risks” and allowing portfolio positioning the most bearish in over a decade to normalize. Any change in central bank rate horizons amplifies this.
AN ‘OUT’ FOR CENTRAL BANKS
Highlighting Thursday’s dramatic market surge after news of a surprisingly large drop in inflation in the United States last month, Jim Leaviss, IT director of government fixed income at M&G, said it showed how ready investors were to take the “right direction” from here.
“Markets are clearly desperate for any signs that central banks might pivot,” he said, adding that the CPI print alone took at least a quarter point off the rate horizon. the Fed next year.
Any suggestion of an end to the conflict in Ukraine would immediately boost hopes for relief in energy and food prices next year and see markets respond in the same way.
“That would remove many rate hikes from all central bank assumptions,” Leaviss said. “Basically, it would give central banks an ‘exit’.”
The prices of oil, natural gas, wheat and certain metals could be the first to fade, thus improving inflation expectations indicators.
For bond markets, the positives from lower inflation and the outlook for policy rates are multiplied by improving government and corporate coffers, easing fears of ever-increasing government borrowing or a spike in high-yield defaults.
Stock markets would feed on any rekindled hopes of a fabled ‘soft landing’ next year – with easier borrowing rates boosting funding, consumer demand and some equity valuations.
Given Europe’s proximity to the conflict and its outsized exposure to natural gas, stocks in the region should outperform. Terms of trade hit by the euro and other world currencies would likely ease, while any “safety bid” on the dollar could see the greenback give up at least some of the extreme gains of 2022.
Geopolitical risk premiums added to battered Chinese investments – partly due to heightened sanctions risks after Ukraine – could also decline somewhat.
But there are notes of caution.
Some investors believe the energy relief and a boost in economic sentiment may simply leave inflation in the system for longer – especially if central banks choose to loosen monetary brakes as a result.
John O’Toole, head of multi-asset investment solutions at Amundi, believes there would be immediate speculation over Ukraine rebuilding – with international conferences to fund projects and stock market increases for companies industries and materials in Europe.
But he doubted the bigger picture was one of strong disinflation – and felt the net economic stimulus could be more dominant.
“With no recession next year, inflation remains sticky and interest rates remain high.”
The opinions expressed here are those of the author, columnist for Reuters.
by Mike Dolan, Twitter: @reutersMikeD Editing by Lincoln Feast
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