Market Overview

Summary of world equity markets in February

Ukraine crisis rocks financial markets: Investors experienced fresh market volatility towards the end of February as global financial markets reacted to Russia’s invasion of Ukraine and widespread government sanctions imposed on Russian financial institutions and oligarchs. European Commission President Ursula von der Leyen warned: “These sanctions will suppress Russia’s economic growth; increase the borrowing costs; raise inflation; intensify capital outflows; and gradually erode its industrial base”. The Bank of Russia raised its key interest rate from 9.5% to 20% in a move designed to support the tumbling rouble. Commodities gained over 6% with Brent oil and natural gas prices rising.

Markets respond to Russian invasion of Ukraine: Share prices in the UK generally fell during February as a whole, as concerns over the prospect of a Russian invasion of Ukraine turned into reality. Many governments, including the UK, the US and the EU, implemented sanctions against Russian financial institutions – including the country’s central bank – and against key individuals. Prime Minister Boris Johnson commented: “Countries that together comprise about half the world economy are now engaged in maximising economic pressure on one that makes up a mere 2%”. Oil giant BP announced that it intended to divest its 19.75% stake in Russian state-owned oil company Rosneft. Having dropped sharply, the FTSE 100 Index recovered some ground to end February only 0.1% lower; however, the FTSE 250 Index fell by 3.9% during the month.

BoE raises rates: In a bid to curb inflationary pressures, the Bank of England (BoE) raised its key base rate from 0.25% to 0.50% during February. Of the nine members of the Monetary Policy Committee (MPC), five voted in favour of the 25 basis point increase, while four argued for a rise of 50 basis points.

Inflation continues to bite: The rate of consumer price inflation reached 5.5% year on year during January, hitting its highest level since March 1992. Meanwhile, according to the British Retail Consortium (BRC), shop price annual inflation almost doubled from 0.8% in December to 1.5% in January, driven by sharp price increases for non-food products. The BRC warned that it would be impossible to protect consumers from future cost increases. However, wage growth has not kept pace with inflation: average earnings (excluding bonuses) rose at an annualised rate of 3.7% in the final three months of 2021.

Question marks over longer-term economic growth: Having contracted by 9.4% in 2020, the UK economy expanded by 7.5% over 2021, although it contracted by 0.2% in December as the Omicron variant affected activity in the retail and hospitality sectors. The short-term growth outlook for the UK remains strong, according to the International Monetary Fund’s (IMF’s) recent report on the economy. Nevertheless, the UK faces “considerable” risks: in particular, the possibility of further waves of Covid-19 and the impact of tensions in Eastern Europe. Looking ahead, the IMF expects the UK economy to expand by 4.7% this year and 2.3% next year.

Oil price surges: Share prices plummeted amid fears over the impact of the conflict: the Dow Jones Industrial Average Index fell by 3.5%, while the Dax Index dropped by 6.5% and the Nikkei 225 Index posted a 1.8% decline. The price of Brent crude oil rose to its highest level since 2014, breaching US$100 per barrel. The conflict is expected to disrupt raw material supply chains, which will stoke existing inflationary pressures.

Inflationary pressures intensify in Europe: The eurozone’s rate of inflation accelerated from 5% in December to reach a record high of 5.1% in January, fuelled by surging energy costs. In comparison, Japan’s rate of consumer price inflation increased for a fifth consecutive month during January, rising at an annualised rate of 0.2%. Japan posted its first calendar year of positive economic growth since 2018 during 2021. The country’s economy expanded by 1.7% over 2021, growing at an annualised rate of 5.4% during the fourth quarter.

US consumer sentiment reaches decade low: The rate of consumer price inflation in the US reached its highest level since February 1982 during January, rising by 7.5% year on year. President Biden commented: “Today is a reminder that Americans’ budgets are being stretched in ways that create real stress at the kitchen table”. Widespread concerns over the impact of soaring inflation drove down US consumer sentiment to its lowest level in a decade during February, according to an index published by the University of Michigan.

Fed expected to tighten in March: The US Federal Reserve (Fed) is widely expected to raise its key federal funds rate at its March meeting. Minutes from the Federal Open Market Committee’s (FOMC’s) January meeting indicated that tightening would “soon be appropriate”, although the scale and pace of rate increases will be informed by economic and financial developments.