Weekly Market Insight

Weekly Market Insight – 7th March 

07th March 2022

Strengthening Russian foothold in Ukraine roils markets again, further sanctions put massive pressure on the Russian economy and oil prices cash through the $100 barrier as question marks surround Russian output.  All these stories and more are covered in this week’s insights update from BlackBee.

Global economy

Last week was again dominated by the invasion of Ukraine with Russian soldiers gaining a firm foothold in Eastern Ukraine amid constant fighting and shelling of the region. The uncertain backdrop for investors was added to late last week with news that Russian troops had seized a Ukrainian nuclear power plant in south east Ukraine. Russian and Ukrainian delegations met on a number of occasions last week although thus far the progress has been focussed on securing evacuation routes for civilians rather than on the prospects for a ceasefire.

Meanwhile economically the sanctions on Russia continue to mount up. The US government added to the previous week’s sanctions with new measures imposed on a number of prominent Russian citizens. In addition, seven Russian banks were excluded from using the SWIFT financial messaging system, further disabling Russia’s ability to transact with the world. The sanctions are already having the desired effect on the Russian economy with the Ruble collapsing by 33% last week (see our chart of the week), forcing the central bank to increase interest rates to 20% and implement some capital controls to stop an exodus of cash from the country. On top of this government borrowing costs have spiked significantly and the Russian stock market remained closed last week to prevent further falls in the price of local securities.  

Away from Russia and the Ukraine the most interesting economic news came via Fed President Jay Powell who suggested in comments to the US Senate that the US central bank would in the short term at least still increase interest rates, an approach which we broadly agree with. Naturally though the conflict in Europe clouds the economic outlook and he acknowledged Fed officials would proceed with care as a result.

Equities

Equity markets again struggled last week as events in Ukraine dominated market sentiment and soaring commodity prices added further to investor nerves around inflation and central bank policies. Within equity markets we too saw examples of international investors withdrawing from Russia on foot of its invasion of Ukraine. In the energy space for example BP, Exxon and Shell all announced plans to exit Russia while the London stock exchange also suspended trading of 27 Russian linked companies. These are good examples of exerting further financial pressure on Russia, effectively starving the country of access to investor capital.

Bonds

Government bonds enjoyed a better week last week as the further deepening of the Russia-Ukraine conflict prompted a flight to safety among investors and bids for government debt with yields falling and prices rising. Within the credit space performances were more mixed with emerging market debt coming under some pressure as a result of the sector’s exposure to Russia.

Commodities

The commodity rally continued last week with oil prices charging through the psychologically important $100 per barrel mark as question marks surround the outlook for Russian oil exports given the financial sanctions on the country. As a nation Russia is the third largest individual producer of oil globally, currently producing around 11 million barrels per day. This puts significant pressure on nations like the US and the OPEC ones to step into any possible Russian oil breach to ensure price pressures don’t get out of hand and threaten the global economic recovery. In this context reports last week that a deal to allow the return of Iranian oil to global markets (which averaged around 4 million barrels per day prior to sanctions) is near was most welcome.

Sector News:

Travel & Hospitality – Omicron, seasonality lead to drop off in January traveller numbers

Last week’s CSO Air and Sea travel statistics for January revealed a decline in the overall level of travel when compared with December 2021. The number of passengers arriving in Ireland fell by 16%, while the number of passengers leaving Ireland decreased by 23%. The drop in passenger numbers was due to concerns over the Omicron strain, as well as the expected seasonal drop off following the Christmas period. As such the figures aren’t highly representative of the outlook for leisure travel demand which is set to improve significantly in 2022 as travel restrictions fade. In the short term however the bigger issue lies around costs, particularly with oil prices rising dramatically in the past month. Such a rise in costs is likely to put the airline sector under renewed pressure just as demand begins to turn the corner, complicating the recovery calculus of companies in the travel sector.  

Housing – Continued strength in Irish mortgage approvals in January

Last week’s January mortgage approval data from the Banking and Payments Federation shows that the lending backdrop into the Irish housing market remains very strong, a factor which should underpin further gradual increases in prices in 2022. All in all, 3,631 mortgages were approved in January 2022 with a total value of €932m, representing an 8% increase in volume and a 13% increase in value when compared with January 2021. First time buyers represented the bulk of this, making up accounted for 52% of total volume, a 9% increase year-on-year, the highest January mortgage volumes for first time buyers since the series began in 2011. This indicates that pipeline activity for mortgage drawdowns will be strong over the coming year. Re-mortgage or mortgage switching activity was also at its highest level in terms of volume and value since the series began with mover purchasers accounting for 22% of total volume. Overall, the strength of housing demand coupled with the availability of mortgage credit should mean that house prices can make further gradual gains in 2022. However, given that housing completions will also continue to recover this year, this should mean that the pace of house price inflation moderates somewhat.