The Russia/Ukraine situation remains fluid and will likely continue to deteriorate with a series of escalating
actions from Russia matched by sanctions from the west. This will continue to dominate headlines and be
a driver of market volatility in the coming days and weeks and we are monitoring the unfolding situation.
But for markets, we maintain the most important factor remains the pace of the Fed’s removal of policy
accommodation and the related trajectory of incoming inflation data.
Russian and Ukrainian hostilities, while geopolitically significant, are unlikely to have a significant impact
on broader global economic fundamentals that ultimately drive market returns. The U.S. and other developed economies are seeing robust demand as the reopening resumes after the recent omicron headwinds.
It is thisstrong underlying demand, coupled with elevated inflation numbers (stemming from supply chain
disruptions) compelling the Fed to accelerate the removal of monetary policy accommodation. The Fed
will be increasing interest rates toward the neutral rate at a faster pace than it had previously anticipated,
along with commencing the rundown of its balance sheet. It is this pivot and associated uncertainty surrounding the monetary policy path that remains the most critical factor for markets. While the Russia/Ukraine situation can amplify near term market volatility and behaviour, it is unlikely to have a measurable impact on these underlying fundamentals. It is also unlikely to alter the evolving view from the Fed
on its path forward.
Beyond headline driven sentiment, one potential avenue for contagion is through energy prices and this
can already be seen in their recent strength. While this may aggravate some inflationary pressures, it is
unlikely to be sufficient to offset the current economic momentum, but is likely more of a headwind in
Europe than the U.S.
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Published February 23, 2022