This Week In Markets: 14th - 18th March 2022 (Ukraine Update, Stocks Outlook, FOMC & BoE Previews)

Hello and happy Sunday. It's the 13th of March. Just going to put together then the major headlines to be aware of from this weekend. Of course, an update on the Russian-Ukraine situation, and also want to talk about Goldman Sachs who have downgraded once again their outlook for the S&P 500 for the second time in a month and the third time year to date. So we'll look at the rationale behind that, and we'll also have a preview for the FOMC meeting. The US central bank very much expected to hike rates by 25 basis points on on Wednesday and outlined then through their projections subsequent rate hikes thereafter. And here in the UK, the Bank of England very much expected to hike rates for the third time as well this Thursday. But let's kick things off and talk about what's going on here in Russia. These graphics taken from BBC News and are accurate as of Saturday night, the 12th of March. So obviously these things updating all the time, but this is the latest as we have it. And Russian airstrikes have shifted further west actually, and close to the city of Lviv, you can see here, and Ukraine's border with Poland. You probably would have read about. And of course, that then started to unearth more friction, of course, with NATO forces within that area as we get closer to that western boundary. Russian military continues to ring the capital of Kyiv. So as you can see here, the direction of advance of the Ukrainian forces as they look to move further into the capital city, still some distance to go. And obviously, this has been the surprise nature of the Ukrainian resistance in combination with logistic issues logistical issues that the Russians have had have led to pretty slow progress in this particular area. That cannot be said though in the south, where Russian advancements continue. A lot of what's been happening at the weekend has been further movement with, uh, Mariupol, of course, which we saw aggressive fighting of last week, looking to connect then the eastern separatist sides of Donetsk and Luhansk to then the further moves north out of the annexed Crimean region. As strategically then, they've looked to take control of the Crimean Canal, which is strategically very key. You can see here that the Dnieper River, which really is the lifeblood of water supply running through Ukraine, but also then the canal work which comes off the river through that southern part of Ukraine into then feeding through in Crimea. And reports I've read talking about water reserve rates in Crimea being exceptionally low, akin to around 5 to 7%. So hence the reason why strategically it's been super important for Russian forces, for them, their point of view at least, to take ground within that area to safeguard the passage of supply from, from the river. Then looking at the, the picture greater on the eastern side, one of the major things that we're seeing here is that the tactical kind of move from the Russians, the direction of the advance here coming from the north as they've come through from Kyiv, of course from Belarus, but also coming from the eastern side, looking to converge forces then to solidify that line across the Russian border between the east and further down here, um, Kharkiv, which we know which has been in focus for some time, down towards that eastern Luhansk, Donetsk region. And then with Mariupol looking to take that entire eastern board side. So that's the latest at the moment. Away from that, really, on the fighting, uh, President Zelensky has said talks with Moscow show signs of becoming actually more substantial. One of his top advisors said they'll, they'll have continuous discussions with Russia that are being held at the moment and are well underway. And of course, this comes after multiple meetings that we've had so far, yet to show real definable progress, but at least the dialogue is continuing. And that is, in some respects, seen as somewhat of a positive, irrespective of the fact that, as I've said, Russian forces continue to advance. But, you know, does that push then the the need then for Ukrainians to really come to the table and start cutting deals and so forth. Importantly for markets from an energy perspective, Russian natural gas supplies to Europe are continuing as normal. That was according to today on Sunday, TASS reported a Gazprom spokesman, so unaffected thus far. And also for Russian equities, which of course they just closed down their, their stock exchange ever since really this started to really escalate. The Bank of Russia has announced that they're extending the halt of stock trading on Moscow exchange till Friday. Was initially due to open on the 14th, tomorrow, on Monday, so they've delayed that. So that's your latest kind of on the, the Russian situation. Of course, that will continue to be a major dominant and fluid theme as we go through the week ahead. The other thing then I did mention was Goldman Sachs. Their strategists have lowered their target for the S&P 500 for the second time in a month. So by numbers, they've downgraded that to 4,700 from 4,900 at the beginning of the year. Only around several weeks ago they were looking for 5,100, so it's come down quite quickly, implying then negative returns for the year, rating from the larger risks stemming from, of course, the higher commodity prices that we're seeing at the moment, and in turn weaker consumer demand and economic growth. Don't forget that it was, of course, and looking at this here, uh, last week GS noted the probability of a US recession in the next year may be now, according to their strategists, as much as 35%, and they cut their forecast for growth hit by soaring oil. So the problem being then that as we start to see this exceptional spike in prices, that that's really going to tilt the yield curve in a sense then indicative of what we have been seeing is the chance of recession has been slowly increasing as growth is going to be impacted by that situation, coming at a time of course when the Fed are going to be executing multiple rate hikes. Um, what does this look like? Well, here's, here's a chart to give it a bit of perspective. Um, so the, the target of course that they have is 4,700. That's substantially above where we of course closed on Friday. We were down at 4,200. So you're looking at a decent move back to the upside. You can see here their recession scenario, they say that recession risk is only partially priced, and in a downside scenario, reduced earnings and valuation multiples would cause the S&P to decline by 15% and go down to 3,600. So giving it a bit of perspective, the week ahead though ultimately is going to be defined not only by what developments we see on the Ukraine front, but also we do have the eagerly anticipated Fed meeting happening on Wednesday night, and of course markets very much now priced for 25 basis points the Ukraine situation completely taking off, then that 50 basis point move that markets were anticipating just a few weeks ago, coupled that with the fact that Fed Chair Powell himself said to Congress a week and a half or so ago that he's inclined to propose and support a 25 basis point rate hike with a series of rate hikes likely thereafter. So that's why the market is so kind of sure on that point, given those communications coming directly from the Fed. As a reminder, the Fed will be releasing their latest economic projections with inflation likely to be revised higher and growth lower. And of course, the dot plot median, the last time we saw that was back in December, so very dated now. And that at the time was for 3 rate hikes for 2022 by the end of the year, and that's likely to end up being closer to the 6 rate hikes, of course, of which what the market is currently positioned for. So that's really what the Fed is looking like. From the Bank of England point of view, the Bank of England is expected to hike interest rates again. They're already kind of well ahead of the Fed at this point in that regard. This is irrespective of the pandemic and despite the threat to growth posed by the Russian situation and its emergence, of course, with focus on inflation likely to head considerably higher, not just in the US but here in the UK as well. Compounded by that electricity price tariff kind of change we've got still to hit in combination with these commodity squeezes that we're seeing. And given a sizable minority of the Bank of England's rate-setting committee voted for an extra large half a percentage point rate increase— remember, in the previous meeting they hiked 25, but the vote split was 5-4, so only by one vote did they secure 25, not 50. So given the fact that proportionally they were leaning quite heavily on that side, That's why markets are very much, in combination with what I said about inflation, expecting a 25 basis point rate hike. Markets are currently braced for a further 5 interest rate rises before the end of 2022, so particularly aggressive at the moment here on that path in the UK. Otherwise, in terms of the week ahead, a couple of things I guess to be aware of outside of those major events. On Monday you've got Eurogroup meeting, that's going to be followed up on Tuesday with the Economic and Financial Affairs Council meeting. So these, of course, coming in the context of the digestion and then potential course of action, of course, that Europe has on its stance with Ukraine is particularly key. And then on Tuesday you do get UK unemployment rate, you've got German ZEW, and then a couple of other things like US PPI also interesting to look out for on, on Tuesday. Wednesday, the FOMC, arguably the main event then, with US retail sales happening just before that at 1:30. Thursday, Bank of England, but as per regular, you get your initial jobless claims came out of the US, but you also get Philly Fed industrial production and building permits and housing starts. And then on Friday, Bank of England— Bank of England— Bank of Japan interest rate decision. So that's the third major one coming at the end of the week, far less exciting and interesting from what we'd like to see from the Fed and the Bank of England, albeit even those events fairly well telegraphed, and I'd say markets are prepared for those in itself, um, more, no, more so now than they have ever been in, in recent weeks, given a lot of the uncertainty on the hawkish tilt. The communication has been relatively clear, I'd say, and markets are relatively well prepared for what's to come from the tightening kind of hints that we've had. And then you've got quadruple witching to be aware of on Friday, but that is it. So I'm not going to talk any longer than I need to. Feel free to connect and follow me on Twitter for my daily notes. I know my morning briefings don't go out on a daily basis now, but I do still put out my daily notes comprising of everything you need to know every weekday morning, available on my handle down here. And feel free to check out the links in the video description for our daily newsletter and Finance Accelerator as well. All right. Take care. Have a good week ahead. Thanks for listening.