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Macroeconomic update by François Duhen

Risk aversion was up on financial markets in February, owing to ongoing concerns about the pace of monetary tightening by the main central banks and, especially, the deepening crisis in Ukraine. Vladimir Putin invaded the country on 24 February, and by the end of the month the war had sent prices of many commodities spiralling higher, which could have a chilling effect on world growth, with Europe poised to take the hardest hit.

In Europe, inflationary pressure continued to ramp up in February, with commodities prices exploding at the end of the month as the fighting in Ukraine intensified. Geopolitical risk is now front and centre, while western countries have adopted a series of sanctions unprecedented in their severity against Russia. For the time being, however, the European Union has not imposed an embargo on Russian oil, unlike the UK and the US, which announced their decisions to do so in early March. With the growth outlook having deteriorated and inflation set to remain elevated for the foreseeable future, markets suffered a severe correction, while long sovereign yields fell a notch in spite of the fact that the ECB is prepared to begin tightening.

In the US, soaring inflation has also raised expectations of faster monetary tightening, with many investors factoring in the possibility of a 50bp-hike as from March, an assumption also fuelled by various Fed members. The Ukrainian conflict will nevertheless also have an impact, albeit to a less extent, on the US economy, which is otherwise dynamic as illustrated by the strong momentum of the labour market. Although relatively stable in February, the dollar ended up rising significantly against the main currencies, particularly the euro, at the start of March, against a background of marked risk aversion.

China has confirmed its move towards a more accommodative monetary policy in an attempt to revive the economy that has already lost momentum in past months, as the abandoning of the zero-Covid health policy is still far from being achieved given hospital tension that is still high in the region, particularly in Hong Kong.

With regard to raw materials, the surge in prices accelerated as a result of increased geopolitical tension, which raises questions about potential interruptions to Russian exports, particularly for gas and oil. Despite hopes of an increase in production by certain OPEC+ countries or a breakthrough on the Iranian nuclear issue allowing a resumption of exports from this country, it is above all the strategic reserves and state aid that have been put forward at this stage. However, these points have not prevented the price of Brent crude oil from reaching a new high since 2014 by exceeding $100/barrel after the start of hostilities in Ukraine, a level that will be clearly exceeded at the beginning of March. The same applies to many industrial metals, as well as to agricultural commodities, particularly wheat, given the high production of this grain in Ukraine and Russia. With regard to gold, it has exceeded the $2,000/oz threshold for the first time since August 2020.

Completed on 4th march 2022