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03/8/22

Sightline Weekly Market Update: Geopolitical Conflict & Its Impact on Inflation

Western equity markets other than the Canadian TSX ended a volatile week lower, continuing the trend that started late in 2021. Last week, investors focused on the unfolding events in Ukraine, pushing technology, consumer discretionary, financials and communication services sectors lower. In contrast, all other sectors gained on the week led by oil jumping 25.3%, bringing the year-to-date gain to 52.5%. Oil backed off the intraweek high to finish at $114.73 per barrel on news that talks with Iran on a nuclear deal have made progress.

The TSX jumped 1.80% in the week unfazed by the Bank of Canada’s rate hike of 0.25% to 0.50% on its overnight rate. Tuesday’s rate hike was the first rate hike by the Canadian Central Bank since 2018. The Bank cited the Russian attack on Ukraine as a “major source of uncertainty,” adding to global inflationary pressures.1 The Dow Jones fell 1.30% in the week, the S&P 500 dropped 1.27%, the Nasdaq fell 2.78%, the S&P Mid-Cap 400 lost 1.73%, and the Russell 2000 lost 1.96%. European stocks fared worst due to Russia’s proximity and reliance on Russian natural gas exports. The pan-European STOXX Europe 600 Index declined about 7%, while the German Dax and French CAC tumbled more than 10% in the week. Italy’s FTSE MIB Index lost a little more than 12%, and UK’s FTSE 100 backed up 6.7%.

The economic data and news of the week were overshadowed by the news out of Ukraine and Russia. Western leaders ramped up the pressure on Russia and many individuals deemed “friends” of Putin by seizing assets and announcing further economic sanctions. The western leaders’ agreement to remove several Russian Banks from SWIFT (the Society for Worldwide Interbank Financial Telecommunication) added to the economic pressures limiting financial transactions. As a result of economic sanctions, the Russian ruble versus the USD tumbled despite the Russian Central Bank moving short-term interest rates to 20% from 9.5%, and the Russian financial markets closed. As investors in Russian securities could not sell holdings, the removal of Russian stocks from the MSCI Index came as no surprise.2

Economic releases kicked off last Monday, with the ISM Chicago Business Barometer sliding to 56.3 from 65.2 in February. A reading over 50 indicates expansion. Companies reported a continued struggle with labor and material shortages. Most employers surveyed expected an increase in wages this year, ranging from 4% to over 10%. Encouraging, however, was the report that prices paid for materials and supplies declined by 2.5% to an 11-month low.3 On the national level, the ISM reported on Tuesday the barometer of American Factories rose 1% from January to 58.6%. The New Order Index increased by 3.8% over January, the Production Index increased 0.7%, and the Price Index decreased 0.5%. The Backlog of Orders jumped 8.6% to 65% from January’s reading of 56.4%. Overall, the report revealed continued demand-driven strength in manufacturing; however, constrained by supply chain difficulties.4 On Thursday, the ISM Services sector read down 3.4 points to a one-year low of 56.5%, reflecting the universal struggle with shortages in labor and supplies.5

On Wednesday, in testimony before the House committee, the Fed Chairman Jerome Powell stated the central bank is leaning to raise the rates 0.25% at the meeting on March 16. Persistent inflation well over 2% and a strong labor market were cited as the rationale for raising rates. The Fed expects to raise rates throughout the year and overtime to a more neutral level of around 2.5%. He also mentioned they were monitoring the events in Ukraine and the implications on inflation.6 On Thursday, the initial jobless claims improved, declining 18,000 over the previous week to 215,000, and continuing claims from all programs decreased 62,625 to 1,971,279.7 On Friday, the US Bureau of Labor Statistics reported the nonfarm payrolls jumped 678,000 in February, edging the unemployment number down to 3.8%. The job growth is led by leisure, hospitality, professional services, healthcare and construction.8

As the omicron virus fades and virus restrictions are slowly removed, the economy is expected to return to a new normal. Current western fixation with clean energy and carbon reduction, along with policies and sanctions against Russian, has split the global economy and ensures inflationary pressures caused by higher energy and food prices for the foreseeable future. Unfortunately, predicted food and energy shortages resulting from sanctions will hit the third world the hardest, and those less fortunate than western countries will pay the price with increased starvation. Globalization benefited everyone compared to the future bifurcation of the global economy. Globalization is deflationary, whereas the splitting of the global economy in two is inflationary.

 

Sources:

1 https://www.aa.com.tr/en/economy/bank-of-canada-raises-interest-rate-to-05-in-first-hike-since-2018/2521396

2 https://www.wsj.com/livecoverage/russia-ukraine-latest-news-2022-03-02/card/msci-to-remove-russian-stocks-from-emerging-market-indexes-JLIyiyPfAzYUEHvbX9Pm

3 https://s3.amazonaws.com/images.chaptermanager.com/chapters/b742ccc3-ff70-8eca-4cf5-ab93a6c8ab97/files/mni-chicago-press-release-2022-02.pdf

4 https://www.ismworld.org/supply-management-news-and-reports/reports/ism-report-on-business/pmi/february/

5 https://www.marketwatch.com/story/service-side-of-u-s-economy-growing-at-slowest-pace-in-a-year-ism-shows-11646320306?mod=economic-report

6 https://www.federalreserve.gov/newsevents/testimony/powell20220302a.htm

7 https://www.dol.gov/ui/data.pdf

8 https://www.bls.gov/news.release/empsit.nr0.htm

 

Important Information:

Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.

Sightline Wealth Management LP (“Sightline”) is an investment dealer and is a member of the Investment Industry Regulatory Organization of Canada (IIROC) and the Canadian Investor Protection Fund (CIPF). Sightline provides management and investment advisory services to high-net-worth individuals and institutional investors primarily through fee-based accounts.

Sightline Wealth Management LP is a wholly owned subsidiary of Ninepoint Financial Group Inc. (“NFG Inc.”). NFG Inc. is also the parent company of Ninepoint Partners LP, it is an investment fund manager and advisor and exempt market dealer. By virtue of the same parent company, Sightline is affiliated with Ninepoint Partners LP. Information and/or materials contained herein is for information purposes only and does not constitute an offer to sell or solicitation to purchase securities of any issuer or any portfolio managed by Sightline Wealth Management or Ninepoint Partners, including Ninepoint managed funds.

The opinions and information contained in this article are those of Sightline Wealth Management (“Sightline”) as of the date of this article and are subject to change without notice. Sightline endeavors to ensure that the content has been compiled from sources that we believe to be reliable. The information is not meant to be used as the primary basis of investment decisions and should not be constructed as advice. Each investor should obtain independent advice before making any investment decisions.

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