Welcome to the weekly macroeconomic round-up, where we spotlight a few of the most significant events in the last few weeks.
US and Europe coordinate to increase economic sanctions on Russia following Ukraine invasion
Russia’s invasion of Ukraine was met with swift sanctions focused on crippling Russia’s economy and its political elite. President Putin and his nearest associates are now subject to asset freezes designed to prevent them from trading or transacting in Europe or the US. Most Russian banks have been excluded from the SWIFT payments system, limiting their ability to make payments and move capital. When Iran was cut out of SWIFT in 2012, it lost 30% of foreign trade.
The President of the European Commission, Ursula von der Leyen, went one step further over the weekend, announcing a freeze of transactions with the Russian central bank, which has $630bn in reserves, comprising foreign government debt, foreign currency and gold. By restricting transactions, Russia will be unable to manage its capital account, source funding and manage its currency. The rouble depreciated by a further 30% following the announcement.
In an effort to halt the depreciation, the Russian central bank raised interest rates from 9.5% to 20%. Putin’s response to the transaction restrictions was to invoke Russia’s nuclear doctrine, which states that Russia “reserves the right to use nuclear weapons for the prevention of an escalation of military actions”.
US economy accelerated as Omicron wave subsided but price pressures continue
The latest round of PMI survey data revealed that US economic activity rebounded in February, as the composite output index rose from 51.1 to 56.0. All components of the headline index improved in February, although the recovery in services activity was the most significant, rising from 51.2 to 56.7.
Respondents to the survey noted the impressive recovery in demand since the disruptions caused by COVID-19 at the start of the year. Also encouraging was the greater availability of raw materials, which have been constraining manufacturing for some time. However, this wasn’t enough to offset the increase in price pressures caused by wage rises.
Putin’s decision to invade Ukraine rocked markets last week, with the price of oil (Brent Crude) rising to above $100 for the first time since 2014 and a rally in safe-haven assets such as gold.
Within equities, there was significant geographic dispersion. Russian equities were worst impacted, recording the third-worst day in stock market history, with a fall of 38%. European equities were also down significantly, reflecting the potential for the conflict in Ukraine to negatively affect European economies, primarily via energy prices and a fall in consumer confidence.
In contrast, although UK and US equities sold off initially, both recovered to end the week in positive territory. This suggests a view in markets that most geopolitical events offer good buying opportunities for equity markets.
Look out for next week’s update, where we’ll be focusing on US non-farm payrolls and the Chinese PMI data.
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