The Military tensions in Eastern Europe disrupt markets

Volatility has been particularly high in recent days, and it seems the situation will last longer for both the stock and currency markets. The main factor remains the situation between Russia and Ukraine as the United States says an invasion is imminent. Russia has denounced ‘American hysteria and believes that a diplomatic solution to the Russian-Western crisis is possible. It is, however, making any de-escalation conditional on a series of security guarantees, including assurances that Ukraine will never joint NATO. Moreover, it want NATO’s military infrastructure to be withdrawn from Eastern Europe, which the West finds unacceptable. Not surprisingly, safe havens have been very popular in recent days. The Swiss franc, which had weakened to 1.0600 against the euro last week, has returned to around 1.0440, while the ounce of gold hit $1,879.55 yesterday morning, a gain of $50 since Friday. The euro, which is particularly exposed to military tensions, has fallen against the dollar from 1.1495 to 1.1300 since last Thursday. Oil prices also soared after the announcement that the US embassy in Ukraine had moved from Kiev to Lviv, interpreted as a new sign of an imminent Russian attack. Crude traded as high as $95.82 and is approaching the $100 mark.

Volatility is also rampant on the economic front and, unsurprisingly, inflation is once again making the headlines. In the United States, the consumer price index published on Thursday reached its highest level since February 1982, at 7.5% on an annual basis. Core inflation, i.e. excluding food and energy, rose by 6% in January on an annual basis, also the highest level in 40 years. With only a few weeks to go before the next Federal Open Market Committee meeting on 16 March, there is significant discussion going on among the members. According to James Bullard of the St. Louis Fed, a voting member, the institution should raise its key rates by a full percentage point before July to combat inflation. He told Bloomberg: ‘I was already more hawkish but I have pulled up dramatically what I think the committee should do’. Mr Bullard estimates that the Fed should achieve this goal over three meetings. There have been intense internal discussions led by Chairman Jerome Powell. Mr Powell had mentioned the possibility of a half-point hike for March at the first meeting of the year on 26 January. In any case, the markets are expecting a strong reaction from the Fed. The future rates for the 30-day Fed Funds are 0.92% for June, 1.29% for September and 1.63% for December this year. The markets will remain nervous until the Fed shows it can get a grip on prices without stunting growth.

On the other side of the Atlantic, ECB President Christine Lagarde again said that the Governing Council would jeopardise the economic recovery if interest rates were raised too quickly. ‘[Raising interest rates] would not solve any of the current problems. On the contrary: if we acted too hastily now, the recovery of our economies could be considerably weaker and jobs would be jeopardised’, she declared. Nevertheless, more and more economists are anticipating an initial tightening by the European Central Bank from the end of 2022, rather than from 2023 onwards as was anticipated a few months ago.

These uncertainties have affected the franc. As we have seen, the latter is being shifted back and forth according to geopolitical events or expectations linked to the ECB. Speculation is emerging about a first rate hike by the SNB. The Zurich Cantonal Bank (ZKB), for example, said on Friday that it expected the SNB to raise its key rates by a quarter-point, first in December this year and then successively in March and June 2023. In a note published on the same day, the bank J. Safra Sarasin indicated that it expects that such a first step will come even earlier, in September, regardless of whether the ECB has raised its rates by then. This would be a first step towards ending negative interest rates and the easy money policy. This development was made possible by the SNB’s recent attitude of tolerating a gradual strengthening of the franc against the euro.

The Central Bank of Russia once again made an impression at its monetary policy meeting on Friday. Although expected, the central bank raised its base rate by 100 points to 9.50%. Inflation, which has been soaring for months, reached 8.7% year-on-year in January, beating the record set in early 2016. This is more than double the 4% target set by the country’s central bank. At the press conference following the meeting, Governor Elvira Nabiulina said that she had even considered a higher increase of 150 points. The rouble did not really react to the news: at the moment it is more sensitive to geopolitical tensions and threats of sanctions by the US than to interest rates.