Russian/Ukraine tensions.

Russian invasion of Ukraine prompts risk-off moves in markets.

Russia has begun what appears to be an effective full-scale invasion of the Ukraine, entailing troops moving into the country not only in the disputed Donbass region but also from and with the support of troops from Belarus. There are also reports of missile strikes on major cities including the Ukrainian capital Kyiv, with airports seemingly a major target. Russian President Vladimir Putin described the action as a ‘special military operation’ rather than an invasion, but Western leaders have condemned this as a decision to go to war.

Ukraine is said to have responded with military force, claiming to have shot down five Russian aircraft and one helicopter so far. US President Biden has confirmed that an emergency G7 meeting will take place today, at which severe sanctions are to be imposed on Russia.

Ukrainian Foreign Minister Dmytro Kuleba has called on the international community to act immediately, including by banning Russian access to the SWIFT international payments system, as well as by providing weapons and financial and humanitarian assistance to Ukraine. In a broad risk-off move, financial markets have reacted with sharp falls in stock markets in Asia and stock market futures in Europe and the US; bond markets have rallied (German 10-year Bund yields are currently down by 7bp); USD and CHF have strengthened; the Brent oil price has surged to above $100/bbl, at present trading at $103.5; and the UK natural gas price has surged to 285p, up 33% on the day.

Global Economic Overview.

Yields have risen globally since the start of the year, as markets move to price in more aggressive monetary policy tightening. The invasion of Ukraine has brought the latest bout of uncertainty, but we expect the impact on global growth to be limited. We are forecasting global growth of 4.3% and 3.7% in 2022 and 2023 respectively. Markets are probably over-zealous in their interest rate pricing, but we have accelerated our monetary policy forecasts. 

We now expect five 25bp Fed hikes this year (prev. three), beginning in March taking the Fed funds target range to 1.25-1.50% end-year, and QT to begin in June. We forecast three more 25bp hikes from the Bank of England in 2022 (was two), in March, May and August. And, as previously outlined, a 25bp hike to the ECB’s Deposit rate looks likely in December. We have upgraded our sovereign bond yield forecasts in line with these changes. The relative accelerations in our policy views are greater for the Fed and the ECB, so we see that weighing on sterling slightly. But we still think the dollar is overvalued, and so cable will likely rise through the course of the year – our end-year target is $1.42.