The top global stock markets will end March higher, but they are all set to record their worst quarter since the coronavirus pandemic first wreaked havoc in 2020.
LONDON – Investors had hoped 2022 would be the year when the market recovery from COVID-19 finally got cemented and life started to feel a little more normal. Boy were they wrong.
Russia’s invasion of Ukraine combined with supercharged global inflation have ignited talk of new geopolitical and economic world orders, setting some staggering milestones in the process.
A $10 trillion wipeout in world stocks followed by a $9 trillion recovery; a rout in bond markets; what is shaping up to be the strongest commodities rally since World War I; and the fastest rise in global interest rates in decades.
Add to that the world’s largest country being gouged out the global financial system, the biggest sovereign credit rating downgrade ever seen and pastings for Japan’s yen and Chinese stocks and the full picture becomes clear.
“It has been one of the most extraordinary quarters I can remember,” said Close Brothers Asset Management’s Chief Investment Officer Robert Alster. “…We all didn’t believe that Russia was going to invade Ukraine.”
However, the shocks far earlier than that, he noted. Investors suddenly grasped that the new Omicron COVID strain wasn’t going to shutter the global economy, and that the world’s most influential central bank, the US Federal Reserve, was now serious about jacking up interest rates.
The main driver of global borrowing costs, the 10-year Treasury yield, leapt from under 1.5 percent to 1.8 percent, knocking 5 percent off MSCI’s world stocks index in January alone.
Fast forward to now and that yield is at 2.4 percent, and two-year US yields have seen their biggest quarterly surge since 1981. More than 200 basis points of Fed interest rate rises are also now expected this year which, if realized, would be the most in a calendar year since 1994.
The top global stock markets will end March higher, but they are all set to record their worst quarter since the coronavirus pandemic first wreaked havoc in 2020.
Those seismic shifts have come as oil and gas prices have raced up 40 percent.
Added to the 57 percent surge in nickel and a 31 percent jump in wheat prices, which have both been driven higher by the Ukraine war, and BofA’sanalysts estimate commodities are on course for their best year since 1915.
That “special military operation’, as Moscow terms it, has seen Russia hit with unprecedented Western sanctions and led to some of the world’s biggest investment funds talking about a new world order.
Russian companies that had shares listed in London and New York have had them removed, the rouble can’t be freely traded anymore and the country’s government and corporate bonds have been all been ejected from the major investment indexes.
President Vladimir Putin has retaliated by saying “unfriendly” places like Europe, where Germany gets more than half its gas from Russia, will have to start paying for the stuff in roubles.
A broader spillover has sent waves through emerging markets, ripping into vulnerable ones but boosting others.
Egypt, which proportionally imports more wheat than any other country, has been forced to devalue its currency 15 percent and ask the IMF for help, as have Tunisia and a long-resistant Sri Lanka.
Emerging market debt is having the second worst quarter on record, down nearly 10 percent on a total return basis, with only the 13.3 percent COVID-induced plunge of the first quarter of 2020 registering worse.
Commodities heavyweights such as Brazil and South Africa meanwhile have the best performing currencies in the world, up 17 percent and 10 percent respectively since the start of the year, and Australia’s dollar is top out of the advanced economies.
“This is a tectonic shift from a geopolitical point of view,” Amundi’s Head of Multi-Asset strategies, Francesco Sandrini, said.
“No one could have imagined that an entire new world order of energy should have been considered.” he added. “Perhaps we are talking about literally the unwinding of globalization.”
This week has also seen a dreaded – albeit brief – “inversion” of a key bit of the US bond yield curve that has been a precursor of economic recessions.
It is the first time that has happened since 2019, while the broader rise in global yields means that the $18 trillion pile of negative-yielding bonds that existed a few years ago – where investors paid for the privilege of lending – is now almost gone. — Reuters
