The following article is from Zhao Wei's macro exploration
Authors: Zhao Wei, Duan Xiaole, Yang Yifan (Zhao Wei is the Chief Economist of Guojin Securities and the Director of China Chief Economist Forum)
Report highlights
Since the end of 2021, the pace of policy normalization in major economies in the United States and Europe has accelerated significantly, coupled with the suppression of risk appetite by the geopolitical conflict in Ukraine, which has led to an increase in market concerns about the exposure of emerging market "tail risks" in 2022. What is the "tail risk" of emerging markets? This article analyzes and can be used for reference.
A question: The background of the Russian-Ukrainian conflict and the possible deductive path? There is no need to be too pessimistic, and the probability of a full-scale outbreak is not large
The Russian-Ukrainian conflict stems from us Us Defense Secretary Austin's visit to Ukraine last October and his strong support for Ukraine's accession to NATO, the fundamental reason is that NATO has squeezed Russia's living space, involving a tripartite game between the United States, Europe and Russia. Ukraine is the last barrier between Russia and NATO, and if Ukraine falls to the West, Russia's strategic living space will be significantly compressed. The Biden administration attracted votes for the midterm elections at the end of the year, and hopes to gain more support through foreign affairs when the internal affairs are unfavorable. There are differences of opinion within the EU.
Looking to the future, the probability of a full-scale military conflict between Russia and Ukraine is not high. Russia's intention was to solve the Ukrainian problem peacefully by building a new architecture. From the perspective of the Ukrainian government, it has realized that the cost of full-scale investment in the United States is becoming increasingly high. For the United States, the cost of full military support for the Ukrainian conflict is prohibitive. From the perspective of Europe, Germany, France and other countries prefer to solve the Ukrainian crisis by peaceful means.
Second question: What is the impact of the Russian-Ukrainian conflict on emerging markets? Short-term, phased suppression of risk appetite
The Russian-Ukrainian conflict has led to a decline in risk appetite, a correction in global risk assets, and an upward trend in the price of safe-haven assets. Under the Russian-Ukrainian conflict, the VIX index soared from 17.62 on January 12 to 31.16 on January 25, driving a correction in major global stock markets. During the same period, although the US 10-year real Treasury yield rose sharply under the heating of interest rate hike expectations, the rise in real interest rates failed to suppress the price of gold, and the increasing risk aversion pushed the PRICE of COMBINE gold from $1827.30 / ounce to $1852.5 / ounce.
From the perspective of emerging market performance, Russia's RTS and WTI crude oil indexes have diverged significantly, and MSCI emerging markets have been affected by the triple impact of rising US Treasury yields, exchange rate depreciation and capital panic. The data shows that from the beginning of the year to February 4, the Russian RTS index fell by 11.51%, and the price of WTI crude oil rose by 21.33%. In addition, the recent market expectations for the Fed's interest rate hikes and balance sheet reductions have become more and more strengthened, the dollar has appreciated against emerging market currencies, and the exchange rate depreciation has become an "accelerator" for the decline of the MSCI index.
Three questions: Will the Russian-Ukrainian conflict become a "black swan" in emerging markets? The impact is controllable and need not be overheated
The probability of a full-blown military conflict in Ukraine has declined, and the impact of a decline in short-term risk appetite on Russia, Ukraine, and other emerging markets has faded. With the development of dialogue between Russia and major NATO economies such as Germany, France and the United Kingdom, and the increase in the Ukrainian government's own concerns about the negative effects of comprehensive control by the United States, the probability of a full-scale military conflict between Russia and Ukraine has decreased. During the Spring Festival, the risk appetite of the global market has been repaired, the US stock market and the Russian stock market have stabilized and rebounded, and the prices of safe-haven assets such as US bonds and German bonds have fallen.
Under the gradual receding of the epidemic, the pressure of capital outflows from emerging markets is not large, and the economic recovery is more flexible. Under the relatively sufficient pricing of the Fed's interest rate hikes and "scene repair", the depreciation pressure of emerging market currencies has declined, and the pressure on capital outflows may not be large. In major emerging economies, the external debt burden is mostly in a reasonably controllable range, which can provide a better ability to resist external risks. In addition, in the process of fading the impact of the epidemic, benefiting from supply chain repair or global demand improvement, the economic resilience of some emerging economies can be expected.
Risk Warning: The Fed's monetary policy tightened more than expected, and the pressure on capital outflows from emerging markets exceeded expectations.
The body of the report
The gradual escalation of the Russian-Ukrainian incident originally stemmed from us Us defense secretary Austin's visit to Ukraine last October and his strong support for Ukraine's accession to NATO. In early 2022, the United States and the United Kingdom continued to provide arms support to Ukraine and repeatedly announced that Russia would "invade" Ukraine in order to create a global panic. On January 26, the four countries of Germany, France, Russia and Ukraine held quadripartite negotiations that believed that the ceasefire agreement in eastern Ukraine should continue to be respected, which cooled the atmosphere of tension in Ukraine but did not make substantive progress. From the end of January to the beginning of February, US Defense Secretary Austin said that he would not send troops to participate in the war between Russia and Ukraine, changing the attitude of reinforcing Ukraine when the war started, and the follow-up military dispatch was only to support NATO and other countries, but the atmosphere of Rendering Russia about to "invade" Ukraine continued.
The fundamental reason for the tension between Russia and Ukraine is that NATO has squeezed Russia's living space, and the Ukraine incident has now risen to a game between the United States, Europe and Russia. On the U.S. side, domestic politics are aimed at attracting votes and resisting Republican attacks on its foreign policy in the November midterm elections, while externally hoping to exacerbate Russia's strategic dilemma while co-opting and bundling European allies. After NATO's continuous eastward expansion, Ukraine has become the last barrier between Russia and NATO, and if Ukraine falls to the West and joins NATO, Russia's strategic living space will be significantly compressed. Despite substantive differences within the EU over The Russian-Ukrainian position, Germany and France want to improve relations between the EU and Russia and strengthen their position and voice in the world.
Looking to the future, the probability of a full-scale military conflict between Russia and Ukraine is not high. From Russia's point of view, the original intention of the military threat to Ukraine is to solve the Ukrainian problem peacefully by building a new architecture. From Ukraine's perspective, its government has realized that the cost of full-scale investment in the United States is becoming increasingly high. From the perspective of the United States, although it is partly in line with its strategic intentions by guiding the Russian-Ukrainian conflict, the cost of full military support for Ukraine may be too high. From a European perspective, Germany and France prefer a peaceful solution to the Ukrainian crisis.
The Russian-Ukrainian incident affected the emotional side, which in turn triggered a phased decline in risk appetite, a correction in global stock markets, and an upward trend in safe-haven assets. As the Russian-Ukrainian incident continues to ferment, panic spreads. The VIX index surged from 17.62 on Jan. 12 to 31.16 on Jan. 25, driving a correction in major global equity markets. In contrast to the fact that the 10-year real Treasury yield in the United States rose sharply from -0.74% to -0.63% under the fed's interest rate hike, the rise in real interest rates failed to suppress the price of gold, and the increasing risk aversion pushed the price of COMBINE gold from $1827.30/ ounce to $1852.5 / oz.
There is a clear divergence between the Russian RTS and WTI crude oil indices. As a major oil exporter, the change in crude oil prices in Russia can determine its national fiscal revenue, export performance, and market trends to a large extent. Therefore, the trend of crude oil prices and Russia's nominal GDP is more the same; in addition, crude oil prices and Russian RTS index correlation is higher, as of 2002 to 2021, WTI crude oil prices and Russian RTS correlation is as high as 0.75, much higher than other major countries. After the Russian-Ukrainian conflict, the price of WTI crude oil and the trend of Russian RTS have diverged significantly. The data shows that from the beginning of the year to February 4, the Russian RTS index fell by 11.51 percentage points, and the price of WTI crude oil rose by 21.33 percentage points.
Since the beginning of the year, the performance of emerging markets has been affected by the triple impact of rising US Treasury yields, exchange rate depreciation and capital panic. On the one hand, the situation between Russia and Ukraine is heating up, both sides are gathering troops in the border area, market risk aversion is heating, resulting in the outflow of funds from risk assets, and then into traditional safe-haven assets, the upward demand for safe-haven assets pushes up the yields of government bonds in some emerging markets, and the data shows that the yields of 10Y Russian, Brazilian and Indian government bonds have all shown a large upward trend in the white-hot stage of the situation. On the other hand, the recent market expectations for the Fed's interest rate hikes and balance sheet reductions have become more and more strengthened, the dollar has appreciated against emerging market currencies, and the exchange rate depreciation has become an "accelerator" for the decline of the MSCI index.
The probability of a full-blown military conflict in Ukraine is declining, and the impact on Russia, Ukraine, and other emerging markets is fading. With the development of dialogue between Russia and major NATO economies such as Germany, France and the United Kingdom, and the increase in the Ukrainian government's own concerns about the negative effects of comprehensive control by the United States, the probability of a full-scale military conflict between Russia and Ukraine has decreased. During the Spring Festival, the risk appetite of the global market has been repaired, the US stock market and the Russian stock market have stabilized and rebounded, and the prices of safe-haven assets such as US bonds and German bonds have fallen.
Monetary contractions in advanced economies have put new pressure on emerging economies, but the pressure on emerging market capital outflows may not be large. Recently, in addition to the Federal Reserve, the Bank of England, the European Central Bank, the Reserve Bank of Australia and other developed economies have also released signals of monetary tightening, which has caused the market to worry about emerging economies. However, this round of monetary tightening in advanced economies may be accompanied by a "weakening of the US dollar" or lead to a decline in the depreciation pressure of emerging market currencies. The reasons include: First, the market has pricing the Fed's interest rate hikes and other relatively sufficient, and second, in the post-epidemic "scene repair" year, non-US economies such as Europe and emerging economies have greater resilience to repair than the United States.
As the epidemic subsides, emerging market economies are more resilient. After the epidemic is gradually controlled, in 2022, the "year of scene repair", production and transportation in emerging markets will improve, inflation will fall, and economic resilience will rebound. In major emerging economies, the external debt burden is mostly in a reasonably controllable range, which can provide a better ability to resist external risks. Second, in the process of fading the impact of the epidemic, the economic resilience of some emerging economies can be expected. In production-oriented economies, countries such as Malaysia, which are more dependent on chip production exports and tourism, have stronger momentum for economic growth. Among resource-based economies, Russia and Brazil, which are mainly commodity exports, are expected to accelerate economic growth under the dual support of price and demand.
After research, we found that:
(1) The fundamental cause of the Russian-Ukrainian incident lies in the game between the United States, Europe and Russia. In early 2022, the United States and the United Kingdom continued to provide arms support to Ukraine and repeatedly declared that Russia would "invade" Ukraine. The US government uses this to stabilize its internal affairs and win over allies, Russia focuses on strategic living space, and Germany and France hope to improve the relationship between the EU and Russia, and strengthen its position and voice in the world.
(2) Looking to the future, the probability of a full-scale military conflict between Russia and Ukraine is not high. Russia's intention was to solve the Ukrainian problem peacefully by building a new architecture. From ukraine's perspective, the government realizes that the cost of full-scale investment in the United States is becoming increasingly high. For the United States, the cost of full military support for Ukraine may be prohibitive. From a European perspective, Germany and France prefer a peaceful solution to the Ukrainian crisis.
(3) The probability of a full-scale military conflict in Ukraine has declined, and the impact of a decline in short-term risk appetite on Russia, Ukraine and other emerging markets has faded. With the development of dialogue between Russia and major NATO economies such as Germany, France and the United Kingdom, and the increase in the Ukrainian government's own concerns about the negative effects of comprehensive control by the United States, the probability of a full-scale military conflict between Russia and Ukraine has decreased. During the Spring Festival, the risk appetite of the global market has been repaired, the US stock market and the Russian stock market have stabilized and rebounded, and the prices of safe-haven assets such as US bonds and German bonds have fallen.
(4) Under the gradual receding of the epidemic, the pressure of capital outflows from emerging markets is not large, and the economic recovery is more flexible. Under the relatively sufficient pricing of the Fed's interest rate hikes and "scene repair", the depreciation pressure of emerging market currencies has declined, and the pressure on capital outflows may not be large. In major emerging economies, the external debt burden is mostly in a reasonably controllable range, which can provide a better ability to resist external risks. In addition, in the process of fading the impact of the epidemic, benefiting from supply chain repair or global demand improvement, the economic resilience of some emerging economies can be expected.
Risk Warning:
1, the Fed monetary policy tightened more than expected: global liquidity tightened, emerging market pressure amplified.
2, global demand and supply chain disruption recovery is less than expected: the global stagflation pressure continues to be large, and the demand decline exceeds expectations.
3. Pressure on capital outflows from emerging markets exceeded expectations: Some emerging market currencies depreciated more than expected, resulting in capital inflows exceeding expectations.