What is the main problem : Central Banks policies or tensions in Ukraine?

What is the main problem : Central Banks policies or tensions in Ukraine?

After Lagarde's speech on February 3 and his posture perceived as Hawkish by investors, sovereign yields in Europe rose very sharply over the entire length of the curves. This situation can be found on the other side of the Atlantic with a speech particularly in favour of tightening by the FED.

Lagarde had to reconsider her statements in order to calm investors who had begun to aggressively sell sovereign debt in Europe, pushing down European credit with them.

 

German Curve change in 1 Month (As of 11th February 2022) - Source: Bloomberg

 

In the United States, the FED seems to have decided to increase its rates and speculation about the pace and level of the increase are like a game; some mention six increases, others three. There is a lot of noise and conflicting information around the FED. Additionally, investors are beginning to point out that the Fed is way behind the curve referring to the Fed Fund Rates (0.07) versus the CPI (7.5%). Investors are worried about this gap and think that Powell will have to close this gap aggressively.

 

US Curve change in 1 Month (As of 11th February 2022) - Source: Bloomberg

 

For our part, we believe that investors in Europe and the United States react far too much on the basis of simple assumptions, while central banks (with the possible exception of the BoE) have not been precise on monetary tightening and leave the door open to flexibility. The US FED official Bullard is also not helping to appease markets with comments in favor of a strong tightening.

The next meetings of Central Banks should give us more indications on the approach of Central Banks for the coming months and their reaction with regard to investors.

The policy of the Central Banks will decide the future of the financing conditions of states and companies, but will also influence the daily life of people with regard to savings and purchasing power mainly.

On March 16, the FED should start raising rates or provide a timetable, the BoE should raise its rates, and finally the ECB should stay on the sidelines and not change its policy.

Finally, the tensions between Russia and Ukraine seem to be exaggerated to us and fueled by the United States, which is visibly determined to include Ukraine in NATO, thus threatening Russian borders. As a reminder, NATO was created in response to the Warsaw Pact during the Cold War. As the Soviet Union no longer existed, NATO had undertaken not to extend its bases in the satellite countries of the former USSR and bordering Russia. We believe that in the event of a conflict it will remain regional and that the West will not participate in a war in this part of the globe like they did in Serbia. In the event of international sanctions by the West, inflation on the prices of raw materials and particularly energy, should be high.

For us, the main problem ultimately remains inflation and Central Banks policies. Nevertheless, due to the panic (probably too strong) linked to the Ukrainian crisis, it remains important to pay attention to developments in the area.

 

 

 

Image : https://unsplash.com/photos/_aUwE2DnIPg - Ibrahim Boran