By Eric Fine
Head of Active EM Debt
Van Eck Associates Corporation

Summary

The possibility of Russia/Ukraine peace talks capture the market’s attention.

Russia/Ukraine peace talks got stocks excited upward and commodities excited downward…or maybe the market just needed anything to get excited about. We’ve been discussing the peace talks for weeks, especially when Israel showed its hand and really started moving them ahead. Turkey, which can provide security guarantees to Ukraine, joined in. Those were big developments, which were completely ignored. Yesterday, comments from Russia about diluting military actions around Kiev and Mariupol finally got the market’s attention. Adding to peace momentum were internal U.S. reactions to President Biden’s verbal slip-ups, particularly seemingly calling for regime change in Russia, which seem to us to be tilting the U.S. tone in the direction of de-escalation, too. The Pentagon, in particular, seems to have awakened to the risks coming from the U.S. stance, and even some U.S. media, like the WSJ, are toning things down. Today, though, Russia said there was no breakthrough and the U.S. State Department said the negotiations could be a Russian ruse. We are skeptical over a peace agreement because too many actors could derail it – it requires security guarantees for Ukraine and for Russia from other parties. But, there’s been clear progress, so stay tuned.

Is Covid back as a market driver? Maybe not. Another possible shock the market is looking at is the move back up in Covid cases in Europe. Unlike previous waves in which mobility declined, though, the reduced mobility isn’t happening this time. High vaccination rates combined with fatigue/doubts over lockdown reactions seem to have changed the economic and market impact of this Covid wave. A better jobs outlook, the removal of Covid as a growth headwind and now maybe peace breaking out (however skeptical we are right now) are really keeping the U.S. Federal Reserve (Fed) on the inflation warpath, and should keep front-end rates pushing higher.

U.S. job growth Inflation remains robust, maintaining upward pressure on U.S. front-end yields. The ADP National Employment Report showed nonfarm private sector employment grew by 455,000 in March, slightly down from the 486,000 in February. We think the market will start to laser-focus on employment this year, so this broad-based growth in employment is important. Why? Well, 2022 is looking like the year in which markets digest several new growth headwinds, such as rising commodity prices, a possible profits recession, accelerating de-globalization, geopolitical uncertainty…and rising interest rates. With U.S. yield curves flatter and inverted (3s/10s and 5s/10s), employment will be the key reference point for the Fed; employment is the only thing that get them off their inflation focus. This report, in other words, puts all of those growth headwinds to the side, and keeps the Fed on their hawkish, anti-inflationary path. Good news for labor is increasingly bad news for interest rates.

Originally published by VanEck on March 30, 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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