The war in Ukraine has tended to increase uncertainty regarding inflation and growth prospects. When and with what consequences this war will end is pure speculation, but capital markets are expected to build a certain immunity to the headline risks in the coming weeks. The medium- to long-term consequences, on the other hand, could be significant. It is possible that we are at the beginning of a new bloc formation or a new Cold War. This would put a significant damper on globalization and further fuel higher structural inflation. 

Wall Street extended losses for a fifth consecutive session on Monday, with the Dow falling 325 points down 1.1%, the S&P 500 retreating 1.0%, and the Nasdaq 0.6%, as signals that inflation is becoming more entrenched in the economy paved the way for further interest rate increases. Similarly, European equity markets closed in the red after attempting a rebound on Monday, dragged by real estate, utilities, and financials shares. The benchmark Euro Stoxx 50 retreated 0.2%, the lowest since November 2020. 

Summary

  • Asian shares traded mixed on Tuesday after a sharp sell-off in the prior session, as traders stayed cautious amid surging bond yields and heightened currency market volatility. Australian, Japanese, and Chinese shares rose in morning trade. Meanwhile, South Korean and Hong Kong equities extended their losses to multi-year lows. 
  • European equity futures are pointing to a positive start, which could be the first day of gains in four.  Elsewhere US markets were also higher in extended trading overnight.   
  • Oil steadied in early morning trading as indications that producer alliance OPEC+ sought to avoid a collapse in prices which, along with a slight softening in the US dollar, tempered an earlier sell-off. 
  • Speculators are betting the UK’s pound will slide to parity with the dollar, after the Sterling tumbled to the weakest on record at $1.0350 on Monday. The Bank of England and UK Treasury failed in a joint bid to calm financial markets as both indicated investors will need to wait until November for a broader policy response to the fallout from the new government’s massive tax cuts. 
  • Cleveland Fed President Loretta Mester gave a hawkish speech on Monday saying that inflation is “unacceptably high” and that “when there is uncertainty, it can be better for policymakers to act more aggressively because aggressive and pre-emptive action can prevent the worst cast outcomes.” She added that she would be “very cautious” when assessing inflation, saying she would need to see several months of month-on-month declines in the inflation rate to be convinced of it peaking. 
  • Goldman Sachs downgraded equities to underweight in its global allocation over the next three months while remaining overweight cash, saying rising real yields and the prospects of a recession suggest the rout has further to run. The Bank’s market-implied recession probability has increased to above 40% following the recent bond sell-off.