Global markets are buckling under the weight of two major worries — inflation and geopolitical tensions — that are growing by the day, with the latter feeding the former. Commodity prices have been rising steeply, as a result of more supply and logistics disruptions stemming from Russia’s invasion of Ukraine. High energy prices, in particular, will be a material contributor to global inflation, being the common denominator affecting all economic activities. And that will drive up broad inflationary pressures. We expect prices for goods and services — likely across the board — to spike in the near term and stabilise at higher levels than previously anticipated over the medium term. Much depends on how long the conflict and sanctions last.
There are a lot of unknowns at this point. The extensive — and expanding — array of sanctions against Russia will surely have significant consequences, intended or otherwise, for better and worse, some of which will be immediate while others will play out over the longer term. For instance, on the positive side, energy supply security concerns will hasten the transition from fossil fuels to renewables. But there is little relief in the short term. Producers, it appears, are less keen to boost output this time around, preferring to pocket bumper profits from the current high prices. A case in point: OPEC+ is sticking to its scheduled, gradual output increases. Anecdotal evidence suggests major shale producers too are signalling higher returns to shareholders instead of increasing capex, at least for now.
Given the magnitude of the prevailing uncertainties, it is not surprising that the US Federal Reserve will try to tread cautiously. Indeed, uncertainties have already tempered market expectations for a more aggressive quantum of interest rate increase in the Fed’s upcoming meeting, scheduled for March 15 and 16. Still, a series of rate hikes appears inevitable at this point, given fast-rising prices — fuelling the current broad market sell-off. High-growth stocks are unsurprisingly harder hit — remember, stock valuations are inversely correlated to discount rates, and earnings further into the future are worth less today — but the sell-off in shares for high-growth and loss-making companies is nothing short of brutal.