By Natalia Gurushina
Chief Economist, Emerging Markets Fixed Income Strategy
Van Eck Associates Corporation

Summary

The global risk-off sentiment is getting more entrenched, with multiplying concerns about the Russia/Ukraine war’s impact on commodity prices, supply chains, trade, and financial linkages.

Russia/Ukraine War, Global Spillovers

The Russia/Ukraine news flow continued to worsen overnight, weighing on the market sentiment. Several global assets crossed important levels – the euro dropping below 1.10 against the U.S. Dollar, the WTI oil blend rising above USD110 per barrel, the 10-year U.S. Treasury yield back below 1.75%, and the price of gold is grinding closer to USD2000. The uncertainty about agricultural exports from Ukraine and fertilizer exports from Russia pushes food prices higher – the active wheat contract was up by 60% since early February (according to Bloomberg LP). Trade and financial linkages feature prominently in economic comments, as well as additional headwinds to growth both in emerging markets (EM) and developed markets (DM) (especially Europe) and a risk of the secondary sanctions. One particular concern is the impact of the war on the global supply chain, which only now showed signs of tentative improvement (see chart below).

China Cycle, Policy Response

Across emerging markets, Asian economies are generally seen as more insulated from the war, albeit higher energy prices pose inflation (and potentially current account) risks in some countries. Today’s upside inflation surprises in Thailand (very sizable) and South Korea suggest that regional central banks might be pushed to adopt a more hawkish policy stance sooner than expected. One big exception in the region is China, which is in a different part of the cycle and had already started to ease in order to prop up growth. The latest signal is that the central bank might deliver another blanket rate cut in March. Premier Li Keqiang’s final report from this week’s meetings of the National People’s Congress and Chinese People’s Political Consultative Conference should provide further insights.

LATAM, EMEA War Exposure

LATAM economies are well positioned to deal with higher commodity prices – this perception was reflected in the regional currencies’ outperformance so far this year – but it is important to keep an eye on local political cycles. Chile is in the midst of re-writing its constitution, while Brazil and Colombia will have presidential elections this year. The situation in Central Europe currently causes the most concern. Regional proximity to the conflict and is an obvious issue. But the economic fallout also includes inflationary (higher) and growth (lower) risks. The need to increase military spending and deal with large refugee inflows can slow fiscal consolidation and put more pressure on central banks to continue hiking or/and intervene on the currency market. Stay tuned!

Chart at a Glance: Can Improvements in Global Supply Chain Be Sustained?1

Chart at a Glance: Can Improvements in Global Supply Chain Be Sustained?

Source: Bloomberg LP

1GSCPI Index – a parsimonious global measure that encompasses several indicators used to capture supply chain disruptions.

Originally published by VanEck on March 4, 2022.

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PMI – Purchasing Managers’ Index: economic indicators derived from monthly surveys of private sector companies. A reading above 50 indicates expansion, and a reading below 50 indicates contraction; ISM – Institute for Supply Management PMI: ISM releases an index based on more than 400 purchasing and supply managers surveys; both in the manufacturing and non-manufacturing industries; CPI – Consumer Price Index: an index of the variation in prices paid by typical consumers for retail goods and other items; PPI – Producer Price Index: a family of indexes that measures the average change in selling prices received by domestic producers of goods and services over time; PCE inflation – Personal Consumption Expenditures Price Index: one measure of U.S. inflation, tracking the change in prices of goods and services purchased by consumers throughout the economy; MSCI – Morgan Stanley Capital International: an American provider of equity, fixed income, hedge fund stock market indexes, and equity portfolio analysis tools; VIX – CBOE Volatility Index: an index created by the Chicago Board Options Exchange (CBOE), which shows the market’s expectation of 30-day volatility. It is constructed using the implied volatilities on S&P 500 index options.; GBI-EM – JP Morgan’s Government Bond Index – Emerging Markets: comprehensive emerging market debt benchmarks that track local currency bonds issued by Emerging market governments; EMBI – JP Morgan’s Emerging Market Bond Index: JP Morgan’s index of dollar-denominated sovereign bonds issued by a selection of emerging market countries; EMBIG – JP Morgan’s Emerging Market Bond Index Global: tracks total returns for traded external debt instruments in emerging markets.

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