The financial effects of the armed conflict between Russia and Ukraine began to be present from the beginning of the year 2022. From that moment on, the uncertainty in the market has been escalating along with the warlike tension between both countries. It was in the last week of February when sharp falls in the stock markets gave way to an environment of high volatility, which continues to prevail in the market.
The movements that have been seen in the financial markets in recent days are due to the lack of certainty about the conflict in Eastern Europe, as well as days of very significant losses (-4.42% intraday Euro Stoxxx 50 on February 24, 2022), important recoveries have also been observed, although of lesser magnitude. In the very short term, volatility will continue. The question that could be asked is: What are the medium and long-term expectations for the economy and what actions will the central banks adopt?
We must begin by mentioning that Russia is one of the main producers of Oil and Natural Gas, its participation is 12% and 17% of world production respectively, the expectations of a decrease in the supply of both energy sources have led prices to significantly high levels, a barrel of Brent oil has broken the $100 barrier and the price of European Natural Gas Futures has risen over 150% year to date. As far as Ukraine is concerned, the possible decrease in agricultural products that it exports to Europe has pushed prices up. With this, what is expected is that the inflation reports, already high worldwide, will continue for a longer time.
In the context of a globalized world, the effects of the war and the sanctions and restrictions that have been imposed on Russia will affect, to a greater or lesser extent, the economic performance of all the countries with which it has commercial relations. These effects will be more severe for European countries, but growth forecasts for the United States have also decreased compared to those at the beginning of the year.
Both factors, high inflation and low growth, present an important challenge for Central Banks. As is known, its general mandates include price stability and maintaining economic conditions to foster growth. It will be necessary to include in this decision the uncertainty that has been generated by the armed conflict, which has made investors reduce their appetite for risk. Although it continues in a context of rising interest rates, in the United States the movement of the markets points to a slowdown in the rate increase by the Federal Reserve.
For their part, local financial markets have not been immune to global movements. As expected, the lack of risk appetite decreased the value of Mexican assets, both the fixed income and variable income markets have suffered losses. Meanwhile, the Mexican Peso has had episodes of depreciation that are not as marked as on other occasions. Regarding short-term interest rates, Banco de México is expected to follow in the footsteps of the FED.
The author is VP of Structured Products at BBVA Asset Management.
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