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Investment Update - Geopolitical turmoil unsettles markets

The global economy continued to readjust following Russia’s invasion of Ukraine, and central banks raised interest rates in the UK and US.

Stock markets were volatile in March, while oil and gas prices continued to soar with Brent crude at one point reaching $139 a barrel. The International Monetary Fund and World Bank warned that increasing commodity prices are likely to fuel inflation for some time. There were also concerns that the world economy could suffer a period of stagflation - surging consumer prices combined with weak economic growth.

The war in Ukraine affected financial markets, as investors weighed up the economic implications of sanctions imposed on Russia. After an initial fall, share prices recovered some of their lost ground over the second half of the month. The price of commodities like oil, gas, and wheat eased following an initial spike higher and reaction to the European Union’s economic response to the war improved investor sentiment.

US and UK raise interest rates

The US Federal Reserve (Fed) hiked interest rates to 0.50% – the first increase since 2018 – and signalled that there are likely to be further rises this year. Consumer price inflation rose again in February, to 7.9%, which dampened the market’s mood. The Fed admitted that the conflict in Ukraine had affected the economic outlook for the US, with uncertainty about whether these effects will be short or long term.

The Bank of England also raised interest rates in March, to 0.75%, which is the same level during the period before the pandemic. The Bank’s peak inflation forecast has been affected by the war in Ukraine, and policymakers admitted that the forecast could be several percentage points higher than the 7.25% level they had previously predicted.

Economists warned that the UK economy could be vulnerable to a fall in consumer spending if energy prices remain high. They predicted that global inflationary pressures will gather pace over the coming months, affecting the economic growth of countries that are net energy importers, like the UK. The latest figures showed that the Consumer Price Index rose to 6.2% in February.

The UK’s Office for National Statistics updated the basket of goods and services it uses to calculate inflation. In come antibacterial wipes, dog and cat collars and electric and hybrid cars. Gold chains, coal, doughnuts and men’s suits are out. For the first time ever, canned beans, chickpeas, lentils and meat-free sausages are now in the basket.

Inflation in the euro area rose to a record high of 5.8% in February. Economic growth forecasts have been cut due to the war in Ukraine. The European Central Bank decided to leave interest rates unchanged at zero at its meeting in early March but announced it would begin to wind down its quantitative easing programme (which was partly how it supported the economy during the pandemic) faster than expected.

China’s crackdown on its tech industry caused another sell-off in its tech stocks. This time, shopping platform Meituan was targeted, causing its share prices to drop. Overall, the Hang Seng Tech Index of technology companies listed in Hong Kong fell to its lowest level since its creation in 2020. China’s top economic official said that the government would take measures to support the economy and financial markets; markets initially performed strongly following this statement, but have since levelled off as we are yet to see those words translate into action. Stocks in China also dropped due to a surge in cases of Covid-19 in parts of the country.

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Key Takeaways

  • The war-affected stock markets, as investors weighed up the economic implications of sanctions imposed on Russia.

  • The US Federal Reserve and the UK’s Bank of England both raised their benchmark interest rated in March.

  • The UK’s Office for National Statistics updated the basket of goods and services.


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