Market Watch: February 2022

Global financial markets retreated in February on fears of Russia’s attack against Ukraine. The future of the Russia-Ukraine confrontation is yet unknown. Strong sanctions restrict Russia’s capacity to utilize its $630 billion foreign reserves. Removing its financial institutions from the SWIFT world payment network is also a major blow against Moscow. Food and energy costs have an apparent economic influence on the international market. Russia is a prominent commodity supplier, responsible for over a tenth of the world wheat supply, about one-sixth of world oil output, and about one-fifth of the world natural gas supply. Brent and WTI oil crossed above $110 per barrel, spiking to 10-year highs.

The S&P/TSX Total Return Index was up 0.13 percent in February as the GDP increased by 4.6 percent last year, compared to a 5.2 percent fall in 2020.

The Canadian economy entered 2022 on a stable path, with fourth-quarter growth above estimates, despite the effect of the Omicron variant and political riots in Ottawa that shut essential crossing points. On an annualized basis, Canada’s economy increased 6.7 percent in the fourth quarter, exceeding economists’ predictions of 6.5 percent, making last year’s GDP increase 4.6 percent, compared to a decrease of 5.2 percent in 2020. January’s GDP is expected to rise 0.2 percent after stalling in December. Moreover, the Canadian loonie rose about 0.24 percent against the US dollar as oil touched $110.

However, The Canadian economy lost 200,000 jobs in January due to stronger public health regulations to curb the COVID-19 variant, although evidence indicates transient damage. The reduction was the most significant since January 2021, when the economy lost 207,800 jobs. The job losses also drove the unemployment rate up to 6.5 percent last month, up from 6.0 percent in December, owing mainly to jobs lost. Meanwhile, the number of Canadians seeking employment barely changed.

On monetary policy, the Bank of Canada is set to raise its benchmark rate for the first time in three years, setting off a series of rises aimed at taming scorching inflation amid Russia’s invasion of Ukraine. Bank officials firmly suggested that rates needed to increase to combat inflation, which touched 5.1 percent in Canada last month, a figure never seen in 30 years, with the expectation that the BoC will raise rates to 0.50 percent from the current historic low of 0.25 percent.

The S&P 500 Total Return index was down 3.14 percent in February as the US economy looks to have entered a more volatile time, following a swift recovery from the pandemic.

The US economy looks to have entered a more volatile time following a swift recovery from the pandemic. Financing costs are rising as the Fed plans to boost interest rates for the first time in four years. Inflation has reached a four-decade record. In addition, persistent labor and supply shortfalls have impacted firms’ capacity to create good products and services to fulfill client demands. Not only that, but Russia’s incursion of Ukraine has rattled financial markets and pushed already high oil prices through the roof. Most analysts estimate that the US’s GDP will increase between 3 to 4 percent in 2022, but the picture is becoming increasingly ambiguous.

Moreover, The United States gained 467,000 new jobs in January, far above expectations in a figure that would likely support the Fed’s aggressive tightening policies. January’s new jobs were much more than the roughly 150,000 number forecasted by analysts and topped the 199,000 jobs gained by the economy in December. Although the better-than-expected performance, the unemployment rate rose to 4 percent, up from 3.9 percent in December, when it was at its lowest level in more than 18 months but above pre-pandemic levels of around 3.5 percent.

Regarding monetary policy, the Fed will increase its benchmark overnight interest rate at its March meeting, which is now near zero. Six rate rises are projected this year, raising the cost of borrowing for individuals and companies. Whereas the Fed’s primary preoccupation remains rising inflation, Russia’s incursion of Ukraine has made a significant change to officials’ consideration, with the effect of driving monetary policy in different ways.

The MSCI ACWI Ex-US Total Return Index was down 3.34 percent in February after Russia invaded Ukraine.

The bombing raids of Ukrainian cities intensified a week after Russian President Vladimir Putin launched a full-scale invasion of its neighbor. Western nations strengthened sanctions against Russia at the same time. After failing to topple Ukraine’s government in less than a week, Western countries are concerned that Russia may resort to new, much more brutal techniques to force its way into towns it had anticipated to seize quickly.

As part of a concerted Western retaliation to the incursion of Ukraine, the EU and the UK decided to impose sanctions against Russia. Sale bans on specific technology were implemented, and heavy fines for M.P.s, the military minister, affluent persons, and banks. The UK also announced that it would prohibit Russian enterprises from obtaining financing in the country and that Russian airline Aeroflot would be barred from flying in the country. The authorization of Gazprom’s Nord Stream 2 project, which would export natural gas from Russia, has been blocked in Germany.

Following similar actions by Canada and the United Kingdom, European Union countries are discussing imposing a ban on Russian ships visiting their ports. MSC and Maersk, two of the world’s largest shipping lines, have halted container deliveries to and from Russia.

The European Union would be severely impacted if Russian commodities shipments were halted. Moscow accounts for around a quarter of its imported oil and about half of its natural gas imports. Worries over the security of the Russian energy supply will add weight on European governments to shift away from imported coal and oil and toward locally supplied renewables in the long run.

The Portfolio Management Team