The week that was

It was another volatile week for stock markets, and even more so for commodity, currency and bonds as investors struggled to digest the implications of expelling Russia from the global economy. A quarter of the world’s wheat comes from Russia and Ukraine and wheat prices were up 40% during the week and oil prices were up another 16% (and now 50% for the year). Most other commodities from industrial metals to soft commodities were also up 5%. It was also quite a polarised environment that left the commodity driven Aussie dollar up 3% against the US Dollar and the Euro down almost 3%. Similarly, the European and UK stock markets were down by 6% while, incredibly, the US market was flat for the week and the Australian market stayed in positive territory. European markets fell for obvious reasons while the reason for the sanguine reaction of the US market has been attributed to its distance from the conflict. However, this is essentially a conflict between Russia and NATO, of which the US is the dominant partner. A more likely explanation is the fall in interest rates, given how sensitive US equities have become to bond rates in recent years. The 10 year rate fell by 0.3% in 2 days before edging back up. Inflation expectations also rose which means that real rates moved even more significantly back into negative territory and are close to where they were at the beginning of the year. A very strong US jobs report on Friday may also have tempered some of the volatility.

Later in the week investors were worried that higher, commodity-driven inflation, along with an overheating economy, would force the Federal Reserve to stick to planned rate rises despite rising geopolitical uncertainty; consequently, interest rate sensitive tech stocks sold off sharply. Banks were also on the back foot amid growing concerns of unintended consequences in the plumbing of the global financial system as result of financial sanctions. Visa and Mastercard had been under pressure to stop Russian banks, which account for about 4% of global revenues, using their payments network. Ultimately they did this over the weekend but share prices had already preempted this and were down around 10% last week.

Australia on the other hand has benefitted from the rise in commodity prices and last week BHP’s 10% rise alone added over 1% to the market’s return after iron ore prices rose by 20%. The other iron ore companies, Woodside, Santos and a host of rare earth and gold miners also contributed to a 2% positive return for the local market over the last week.

Bond investors got some respite last week as long bond nominal rates fell back meaning that local government bonds were up for the first time this year (up by 0.5% but still down by 2% for the year). Credit spreads remained stable and most floating rate note credit funds are just down a few basis points for the year. The big winner in the bond universe last week was inflation linked bonds which were up 3%. Interestingly though this asset class is actually down for the year, reminding us that making money in an environment of rising inflation is not as easy as in the conditions we have enjoyed for the last 40 years. The only sure-fire inflation hedge recently has been in commodities, where many investors are now underweight due to ethical concerns.